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TAX MATTERS

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June 2013

OICs Making a Comeback
After declining for five years, the aggregate amount of offers in compromise (OICs) increased from 2010 through 2012. From 2009 to 2012, the number of OICs accepted rose to 23,628, a 122% increase (see related graphic, “OICs on the Rebound”).

By 2009, the number of OICs accepted by the IRS had fallen to only 37% of the approximately 29,000 accepted in 2002. The total amount of accepted offers had fallen as well, from more than $300 million in 2002 to less than $130 million in 2010, a 57% decrease.

An OIC is an agreement by which taxpayers can settle their tax liabilities with the IRS for less than the full amount owed if they cannot pay the full amount in a lump sum or payment agreement.

The total amount compromised rose from 2010 to 2012 by a smaller percentage, 51%, than the number of OICs accepted, suggesting much of the growth may have come from smaller amounts compromised on average.

In her 2012 Annual Report to Congress, National Taxpayer Advocate Nina Olson attributed the increase to the IRS’s Fresh Start initiative, which expanded and streamlined OICs as part of the IRS’s effort to help financially struggling taxpayers in the wake of the recession of 2008–2009. As part of Fresh Start, in February 2011 (IR-2011-20), the IRS announced it was raising its OIC income eligibility ceiling to $100,000 and doubled the maximum tax liability eligible for compromise to $50,000. In May 2012, the IRS announced (IR-2012-53) more flexible terms for OICs. These included simplifying the calculation of taxpayers’ reasonable collection potential (RCP) and guidance on including payments on delinquent state and local taxes and student loans in living expenses allowed in calculating RCP. The IRS also expanded items allowable under miscellaneous living expenses to include credit card payments and bank fees and charges.

Despite the increase, Olson said in her report, OICs remain underutilized and represent “a very small percentage of the delinquent taxpayer population.” 

IRS Identity Theft Enforcement Liaison Goes Nationwide
The IRS in late March expanded its pilot Law Enforcement Assistance Program on identity theft to all 50 states and the District of Columbia (IR-2013-34). Under the program, state and local law enforcement officials with evidence of identity theft involving fraudulently filed tax returns can obtain tax return information of identity theft victims from the IRS to aid in their enforcement efforts.

As under the pilot program, state and local law enforcement officials with evidence of identity theft involving fraudulently filed federal tax returns will receive permission from the identity theft victim by having him or her complete a special IRS disclosure form so the IRS can provide law enforcement with the fraudulently filed tax return. Law enforcement representatives can then submit this consent to the IRS Criminal Investigation Division, along with a copy of the police report. The IRS will assist law enforcement in locating identity theft victims and obtaining their consent on the special IRS disclosure form.

The program was rolled out in April 2012 in Florida, the state with the highest per capita rate of reported identity theft complaints (see Treasury Inspector General for Tax Administration Rep’t No. 2012-40-050). It was expanded to eight more states last October (Alabama, California, Georgia, New Jersey, New York, Oklahoma, Pennsylvania, and Texas).

AIG Denied Summary Judgment on Economic Substance
The District Court for the Southern District of New York ruled that the economic substance doctrine applies to transactions by American International Group Inc. (AIG) involving foreign tax credits (American International Group, Inc., No. 09-CIV-1871, (S.D.N.Y. 3/29/13)). In denying AIG’s motion for summary judgment, the court held that AIG must show its lending transactions with foreign banks had a business purpose or economic effect other than creating tax benefits.

In 2008, the IRS disallowed foreign tax credits claimed by AIG on its 1997 return stemming from transactions between 1993 and 1997 with six foreign banks, claiming the transactions were so-called foreign tax credit generators. AIG paid the assessment, penalties, and interest and argued in a refund suit that the transactions’ purpose and effect were to generate a $168.8 million pretax profit for itself. The court, however, held that the figure did not exclude tax benefits of tax-exempt dividends that the parties considered in setting lending rates and without which, a government expert testified, the profit would not have occurred.

In Notice 2004-19 the IRS reiterated its long-standing position that foreign tax credit generators, which involve cross-border arbitrage where any reasonably expected economic profit is insubstantial compared with foreign tax credits generated, are abusive transactions.

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