An offer in compromise based on doubt as to collectability requires the taxpayer to submit income information to permit the IRS to analyze future income that may be devoted to paying off tax liability. But an offer in compromise can be pending with the IRS for months before it is either accepted or rejected and appealed. What if the taxpayer’s income changes during those months? What does the IRS then require?
Once the offer in compromise has been filed:
- Financial information older than 12 months. “If during the investigation, the financial information becomes older than 12 months and it appears significant changes have occurred, a request for updated information may be appropriate.”[1]
- Processing delays. If information has become outdated through processing delays and through no fault of the IRS, it may be appropriate to rely on outdated information if there is no indication that the taxpayer’s overall situation has “significantly changed.”[2] (emphasis added)
Therefore, the IRS should not review income after it has been submitted by the taxpayer until the information is older than a year or if the IRS has reason to believe that the income has significantly changed.
This tracks closely the need to update income information during field collection efforts prior to the application for an offer in compromise or other tax resolution. In these circumstances, the IRS should seek updated financial information only under limited circumstances.
- Income has been previously verified. If a previous revenue officer has completed a full financial analysis within the last 12 months, the asset and income information should not be reinvestigated unless there is reason to believe the taxpayer’s situation has “significantly changed.”[3] (emphasis added)
- Income information becomes older than 12 months. If during investigation of the case, income, asset and expense information becomes older than 12 months, the IRS will want to update information. If there is reason to believe the taxpayer’s situation “may have significantly changed”, the IRS is to secure a new collection information statement.[4] (emphasis added).
I urge taxpayers to consult with tax professionals concerning the reporting of financial information to the IRS to insure that the information is reported correctly.
Jared M. Le Fevre is a Partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP. Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah. Mr. Le Fevre is involved in federal and state and local tax audits, appeals, and tax resolution throughout these western states.
[1] IRM 5.8.5.3.
[2] Id.
[3] IRM 5.15.1.4.
[4] IRM 5.15.1.2.