Offers in Compromise

If a taxpayer is facing a tax liability far beyond his/her/its ability to pay, even in a payment plan, the best option may be an Offer in Compromise (OIC), authorized under section 7122 of the Internal Revenue Code. An offer in compromise is an agreement between the IRS and the taxpayer to settle the debt for less than what is actually owed.

The tricky part is that the acceptance of an Offer in Compromise is in the control of the IRS. The IRS is not obligated to settle a taxpayer’s liability for less than what the taxpayer actually owes, and it is the IRS’s job to get the most money they can out of each taxpayer.

• Types of Offers in Compromise

The IRS is authorized to compromise liabilities on three different grounds: Doubt as to Liability (DATL), Doubt as to Collectibility (DATC), or to promote Effective Tax Administration (ETA).

1. Doubt as to Liability
   The basis for Doubt as to Liability offers is that a legitimate doubt exists that the assessed tax liability is correct and owed. Among the possible reasons for submitting a doubt as to liability offer are that the examiner made a mistake interpreting the law, the examiner made a mistake in calculating the tax, the tax examiner failed to consider the taxpayer’s evidence presented, or the taxpayer has new evidence to consider.
   Taxpayers filing “Doubt as to Liability” offers are required to submit Form 656-L claiming that all or part of the assessed tax liability is incorrect. Form 656-L must reflect the amount the taxpayer believes is the correct amount of the tax liability after credits and payments, and must include a detailed statement explaining why it is believed the tax is incorrect, along with any supporting documentation.  No deposit or application fee is required for a “Doubt as to Liability” offer.
2. Doubt as to Collectibility
   The basis for Doubt as to Collectibility offers is that there is a reasonable doubt that the tax can be paid in full within the statute of limitations for collection (generally, 10 years from the date tax is assessed). Doubt as to Collectibility offers are the most common offers.
   To file a “Doubt as to Collectibility” offer, Form 656 and financial statements (Form 433-A (OIC) and/or Form 433-B (OIC)) are submitted to the IRS along with substantiation for the amounts listed on the financial statements. Unless certain low income criteria are met, the IRS requires a non-refundable filing fee (currently $186) when the offer is submitted.
   When these types of offers are submitted, the taxpayer must also select a payment option and include a down payment with the offer. Under the lump sum cash payment option, the taxpayer is required to pay 20% of the total offer amount with the offer, and the remaining balance of the offer amount in five or fewer payments within five months of the date the offer is accepted.  Under the period payment option, the taxpayer is required to pay the full offer amount in monthly payments over 24 months, with the first payment being due with the offer.  The 20% down payment and periodic payments made while the offer is pending are non-refundable whether the IRS accepts or rejects the offer.
   In Doubt as to Collectability cases, the IRS’s decision in whether to accept or reject an Offer in Compromise is based upon taxpayer’s “reasonable collection potential,” or the amount the IRS anticipates can be collected from the taxpayer using all available means, including administrative and judicial collection remedies. The taxpayer is required to submit a detailed financial statement of his assets, liabilities, income and expenses, with documentation supporting the amounts listed on the financial statement.
3. Effective Tax Administration (a/k/a Exceptional Circumstances)
   An Effective Tax Administration offer may be appropriate when there is no doubt that the liability is correct or can be paid in full, but an exceptional circumstance exists that warrant the IRS to consider an Offer in Compromise. To be eligible for compromise under this basis, a taxpayer must demonstrate that the collection of the tax would create an economic hardship (only applicable in the case of individuals) or would be against public policy/equity.  The IRS will not enter into compromises to promote effective tax administration if the compromise of the liability would undermine compliance by taxpayers with the tax laws.
   The forms used for submitting “Effective Tax Administration” offers are the same as those used to submit “Doubt as to Collectibility” offers. The taxpayer must also submit a non-refundable filing fee of $186, and a non-refundable down payment based upon the payment option selected by the taxpayer.

• Qualifying for an Offer in Compromise

In order to qualify for an Offer in Compromise, a taxpayer must have filed all required tax returns prior to submitting the offer. While the offer is pending, the taxpayer must continue to timely file all returns and pay all taxes by their due date.  Failure to do so may result in an automatic rejection of the offer.

If the IRS accepts the taxpayer’s offer, the unpaid tax debt(s) are forgiven so long as a number of conditions are met. The IRS expects that the taxpayer will have no further delinquencies and will fully comply with the tax laws.  If the taxpayer does not abide by all the terms and conditions of the Offer in Compromise, the IRS may determine that the Offer in Compromise is in default, and seek to collect the full amount of the tax liability. These terms include the requirement that, while the Offer in Compromise is pending (before acceptance) and for a period of five years after its acceptance, the taxpayer must timely file all tax returns and pay all taxes. When an Offer in Compromise is declared to be in default, the agreement is no longer in effect and the IRS may then collect the amounts originally owed, plus interest and penalties.

There are very specific, complex rules that must be followed prior to the submission and acceptance of an Offer in Compromise by the IRS and many taxpayers will not qualify.  Thus, you should be wary of individuals or companies that boast that they can easily settle IRS tax debts for pennies on the dollar.

For taxpayers that qualify, an Offer in Compromise is a great way to resolve tax liabilities and give taxpayers a fresh start. However, the decision to submit an Offer Compromise is complicated and many factors need to be considered to properly analyze the situation.  The success of your Offer in Compromise depends on the proper application of the tax laws, experience with the IRS, and attention to all the detail of your case in order to get the best result for you.

Make sure you fully understand all the terms and conditions you are agreeing to before you submit your Offer in Compromise. The timing of an offer submission and the designation of the payments (to specific tax years) can greatly impact your chances of a good resolution.

The tax attorneys at the Politte Law Offices are familiar with the Offer in Compromise process, and will analyze your case to determine the avenues available, including whether an Offer in Compromise is right for you. We will then negotiate with the IRS and present persuasive arguments for acceptance of an Offer in Compromise.  Make sure you have the best chance of success and are not wasting your money.