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Offers in Compromise

Under Internal Revenue Code Section 7122(a) the IRS has discretion to compromise any civil or criminal liability for taxes, interest and penalties.  A taxpayer unable to pay his full tax liability may be able to obtain a settlement discharging all liabilities upon payment of a discounted settlement amount.  This settlement program is widely used although it can be said, as a general statement, that the IRS does not easily walk away from existing liabilities because of an inability to pay.

There is a second type of Offer in Compromise which is seldom used but with the right set of facts can be very successful.  This Offer in Compromise program also allows a post assessment audit program for taxpayers who disagree with existing tax assessments.  An OIC request can be filed to challenge existing tax liabilities.  This is referred to as an Offer in Compromise based upon "doubt as to liability".  This office has had good success with offers based on Doubt as to Liability.  However, excellent taxpayer documentation of the correct tax liability is mandatory.

The balance of the following comments applies only to offers submitted to compromise an existing tax liability for reasons of inability to pay.

Doubt as to collectibility exists when a taxpayer demonstrates that he/she is unable to fully pay all existing tax liabilities through a liquidation of all assets and/or entering into a monthly installment payment agreement based upon available cash flow.  In other words, the taxpayer's reasonable collection potential is less than the liability owed.  Regulation Section 301.7122.1(b)(2).

There are also "special circumstances" cases in doubt as to collectibility cases.  Economic hardship or public policy/equity factors can justify acceptance of an OIC for less than reasonable collection potential. 

Treasury Regulation 301.7122.1(b)(3) indicates that offers will be accepted under the "Effective Tax Administration" program where circumstances call for different treatment of the taxpayer.  This office has not found the IRS disposed to entertain submissions based on effective tax administration and is only aware of several successful such submissions. 

OIC Payment Arrangements

1. Lump sum:  The offer will be paid over the course of several months after acceptance.  The taxpayer must include a down payment of 20% of the offered amount as well as a $150 processing fee.
2. Short term deferred:  The offer will be paid over a period of 6 to 24 months.  The offer must be accompanied by the first installment payment and thereafter, during the processing period, regular monthly installments must be continued.  If the offer is rejected the payments made will not be refunded.
3. Deferred payment period:  The monthly payment stream is over the remaining life of the collection statute of limitations.  If the offer will be paid for a period longer than 25 months the offer must be accompanied by the first installment with continuing regular monthly payments.  Installment payments will not be refunded upon rejection of the offer.
4. If the Service fails to act on an offer within two years of submission, it will be deemed accepted.

 Other Considerations

1. Once an Offer in Compromise (Form 656) is accepted for processing by the IRS an IRS collection hold is placed on levy action against the taxpayer until OIC negotiations are complete.
2. Offers will not be accepted if the offer did not include an application fee and down payment/first payment with the submission nor will it be accepted if the taxpayer is currently out of compliance with regulations, e.g., unfiled returns or lack of estimated tax payment for the current year.
3. The IRS will not accept an offer when the taxpayer is in a bankruptcy proceeding.
4. Recently mediation and arbitration forums are available in Offer in Compromise cases.  IRS annoucement 2008-111, 2008-48 IRB 1224.  This can be extremely important as Offer in Compromise units are overworked and are prone to find reasons for rejecting an offer very quickly.  Mediation/arbitration forces the taxpayer to face realities of his ability to pay.  It also forces the Internal Revenue Service to spend material amounts of preparation time and take reasonable positions.