A contracting company in Kane County, Illinois, carried tax balances for the business and for its owner that neither could pay in full. PFGTAX filed an Offer in Compromise in July 2021, and the IRS took sixteen months to review it. On November 30, 2022, the IRS accepted the offer at $5,726.00. The path to that number included a new tax bill, a revised offer, and a deadline of September 9, 2022.

How it started

The company ran on payroll. Crews had to be paid every period, and the owner’s personal income depended on the company staying open. That setup is common with small contractors. When business taxes fall behind, the owner’s personal taxes often fall behind with them. This file held balances for both the company and the owner.

The IRS cannot simply forgive a debt because it is large. An Offer in Compromise, the program that lets the IRS accept less than the full balance, works only when the numbers show the IRS cannot collect more over the time it has left. PFGTAX built the offer on two financial statements, Form 433-B for the business and Form 433-A for the owner. The IRS reviews both line by line.

A sixteen month review with a moving target

PFGTAX sent the offer to the IRS on July 8, 2021. The package included Form 656, the offer application, along with the $205.00 application fee and a $439.00 down payment. The cover letter asked the IRS to consider the offer under Effective Tax Administration. That part of the program allows a compromise when collecting the full balance would cause real hardship or be unfair, even where the numbers alone might say otherwise.

The letter also made two points about the company’s finances. First, the cash showing in the bank statements at the end of each month was payroll money, not savings. Second, the company’s equipment and other assets all earned income, so PFGTAX left that equity out of the calculation. An offer specialist, the IRS employee who evaluates the offer, reviewed those claims for more than a year.

Then the file changed. On August 26, 2022, the offer specialist wrote with two requests. The company had incurred a new tax liability of $1,291.55 for the second quarter of 2022. The IRS wanted that paid through EFTPS, the federal electronic tax payment system, with proof sent back. The specialist also finished the financial analysis and found that the offer needed to rise to $5,726.00. The remaining twenty percent, $707.00, was due with the revised terms. The IRS set a response date of September 9, 2022 and warned that the offer could be returned or rejected if that date passed.

What we did

The new second quarter balance came first. A new balance during a pending offer can sink it, because the IRS treats the taxpayer as out of compliance. Then came the revised terms. On September 6, 2022, the IRS faxed PFGTAX the specialist’s worksheets and the addendum. Form 14640 changes the amount on an offer already in the system, and the addendum in this file carries the date September 12, 2022.

PFGTAX answered each request in the specialist’s letter in order and tracked every deadline against the September 9 response date. A missed date would have sent the offer back to the IRS queue, or out of it entirely.

The outcome

The IRS offer unit in Long Beach, California, issued its acceptance letter on November 30, 2022. The letter says the IRS accepted the offer the owner signed on July 19, 2021, as modified by the addendum dated September 12, 2022. The offer amount is $5,726.00.

Acceptance does not end the obligation. The IRS requires the company to file every return and pay every tax on time for five years from the date of the letter. If a federal tax lien was filed, the IRS releases it after the offer is paid in full. The Kane County Cougars still play in Geneva each summer, and the owner can plan the next season’s payroll without an open offer hanging over the company.

Why it matters

An offer fails more often than it succeeds. The IRS accepts about one in five nationally, and many of the rest fail on paperwork or timing rather than on the merits. This case worked because the financial statements held up and the IRS accepted the revised terms after the new balance came up.

A contractor with payroll and personal balances should know the review can run long and can change direction. A pending offer needs the same discipline as the offer itself.

Frequently asked questions

What is an Offer in Compromise?

An Offer in Compromise is an agreement to settle a tax debt for less than the full balance. IRC 7122 authorizes it, and IRM 5.8 sets out how the IRS reviews it. The IRS accepts an offer only when it concludes it cannot collect the full amount in a reasonable time.

What is Effective Tax Administration?

Effective Tax Administration is a part of the Offer in Compromise program under IRC 7122 and IRM 5.8. It applies when the taxpayer could pay in full on paper, but collecting the full balance would cause serious hardship or be unfair. These offers are less common and need a clear explanation of the facts.

What does Form 14640 do?

Form 14640 is an addendum to an offer already under review. It lets a taxpayer change the amount or the payment terms without filing a new application. In this case, the addendum raised the offer to the amount the IRS offer specialist calculated.

Why did a new tax balance matter while the offer was pending?

The IRS expects a taxpayer to stay current on filing and payments while it reviews an offer, and it can return an offer when the taxpayer falls behind. Here, the offer specialist asked for the second quarter 2022 balance to be paid by EFTPS and for proof of payment before the offer could move forward.

What happens after the IRS accepts an offer?

The taxpayer must file all returns and pay all taxes on time for five years. A default can reinstate the original balance. If the IRS filed a federal tax lien, the lien release follows full payment of the offer under IRC 6325 and IRM 5.12, although the timing can vary if the final payment comes by credit or debit card.

Every case is different. Outcomes depend on a taxpayer’s specific financial situation, and PFGTAX does not guarantee any particular result or reduction in tax debt.