FAQ's

Taxation

My accountant is always after me to keep better records and receipts. Is this really necessary?

Yes. Without proper documentation, you can lose your bona fide tax deductions. No matter how "valid" your business-related expense deductions are, without proper documentation, the IRS and/or the Oregon Department of Revenue can lawfully deny them in an audit. The taxpayer has the responsibility to maintain records that support the accurate determination of the deductions shown on the tax return. The records should be made at or near the time of the expense and be permanent, accurate and complete. Your records should include sales slips, receipts, canceled checks, credit card statements, etc. For automobile expenses you must write down your business related mileage. For business meal and entertainment expenses, your records must substantiate the amount, date and time, location of the business activity, business purpose, and the business relationship with the person involved. In other words, in a audit situation, the taxpayer has the burden to "prove it—or lose it."
I owe the IRS significant amounts of back taxes, together with penalties and interest that I can’t pay. Is there any way to "settle" with the IRS for a lesser amount?
Yes, depending on your financial circumstances. If you cannot pay your tax debt in full or you dispute the amount that is owed, you may propose to resolve the matter with an Offer in Compromise. The purpose of an Offer in Compromise is to settle a taxpayer’s liability for less than the full amount owed. To submit an offer, you must complete IRS Form 656, "Offer in Compromise." If the basis of your offer is inability to pay (doubt as to collectibility), you must also complete Form 433-A, Collection Information Statement for Individuals, and/or Form 433-B, Collection Information Statement for Businesses. The IRS will not consider an offer based on inability to pay if you have already filed a bankruptcy petition or if you have not filed all federal tax returns. If you operate a business, you must also have filed timely employment tax returns for the two prior quarters and made all employment tax deposits on time for the two prior quarters as well as for the current quarter.

Generally, the amount of your offer should equal or exceed your equity in assets, your ability to make installment payments from future income, amounts the IRS can collect from third parties on your behalf and funds that are otherwise available to you but not subject to the IRS’s collection actions. You may elect to pay the offer amount in a lump sum, in monthly payments over the remainder of statute of limitation period allowed for collections, or a combination of a lump sum and monthly payments. As a general rule, it will be in your best interests to pay the amount in the shortest possible time because longer payment terms will require a larger offer amount.

If the basis of the offer is a dispute as to the amount or what is owed (doubt as to liability), you will need to provide a written statement of supporting evidence. The IRS cannot accept a compromise on the basis of a dispute as to what is owed if a court has decided the liability.

Ordinarily, the IRS will withhold collection actions while they consider your offer; however the statue of limitation period allowed for collection is suspended during the time period you offer is pending. The IRS is prohibited from collecting a tax liability by levy:
1. during any period that a taxpayer’s offer in compromise for that period is pending;
2. during the 30 days following rejection of an offer; and
3. during any period in which an appeal of the rejection of an offer is being considered.
In addition, taxpayers whose offers are rejected and who make good faith revisions of their offers and resubmit them within 30 days of the rejection or return will be eligible for a continuous period of relief from collection by levy. However, this prohibition on levy does not apply if the IRS determines that collection is in jeopardy or if the offer was submitted solely to delay collection. An examiner will evaluate your offer and may request additional documentation from you to verify financial or other information you provide. If the IRS decides that a larger offer amount is necessary to "justify" acceptance, you will be given the opportunity to amend the offer. If the IRS rejects your offer, you will be notified by letter explaining the reasons for the rejection and including detailed instructions on how to appeal the IRS decision.
Why should I go through the trouble of an offer in compromise when bankruptcy is available?

The overlay of tax law and bankruptcy law is very complicated and will lead to different results for each taxpayer depending on their particular facts and circumstances. Therefore, you must seek advice from experienced tax and bankruptcy practitioners before deciding on the best course of action. State tax laws differ too and may be an important factor in your particular situation. Assuming the taxes were assessed within the statutory periods, a bankruptcy proceeding will result in you paying nothing on all dischargeable tax liabilities, state and federal. On the other hand, an offer in compromise will result in you paying at least some part of the federal tax liability. Alternatively, the offer may be rejected entirely. While the IRS will withhold enforced collection actions during the offer evaluation and appeal process, the state tax department may not. The automatic stay in bankruptcy stops all collection efforts by creditors including the IRS and state tax departments. Fees are also generally higher in an offer in compromise proceeding due to the time required to submit and offer and respond to the IRS. On the other hand, attorneys’ fees for preparing the bankruptcy petition and schedules are often relatively smaller. However, there is one very significant advantage to an offer in compromise—tax liens are removed upon acceptance of the offer. In a bankruptcy, any tax liens filed before the bankruptcy petition are allowed to remain until they expire by operation of law, i.e. 10 years. Further, some states like California, have no statue of limitations on collection.