The IRS Offer-In-Compromise Program – How Does It Really Work?

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed. If the tax liabilities can be fully paid through an installment agreement or other means, the taxpayer, in most cases, will not be eligible for an OIC.

In order to be eligible for an OIC the taxpayer must have:

1. filed all tax returns;
2. made all required estimated tax payments for the current year; and
3. made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.

The IRS will not accept an OIC Settlement unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (RCP), which is the term used by the IRS to describe how the IRS measures a taxpayer’s ability to pay. The RCP includes the value that can be realized from the taxpayer’s assets, and also includes anticipated future income, less certain amounts allowed for basic living expenses.

Thus, OIC qualification is based on a computation of the taxpayer’s ability to pay his or her tax debt before the IRS runs out of time to collect the debt (called the collection statute expiration date). The IRS decision is not at all largely subjective and is instead based on computational formulas.

However, qualifying for and obtaining an OIC are two different things. Qualifying for an OIC does not mean your client will obtain an OIC. To obtain an OIC, your client must be able to pay the offer amount, which is the computed amount required to be paid to the IRS to settle the debt.

The IRS may accept an Offer in Compromise Settlement based on three grounds.

1. Doubt as to Liability.

Acceptance is permitted if there is doubt as to liability. This is applicable only when genuine doubt exists under applicable law that the IRS has correctly determined the amount owed.

2. Doubt as to Collectability.

Acceptance is permitted if there is doubt that the amount owed is fully collectible. This means that doubt as to collectibility exists in any case where the taxpayer’s assets and income are less than the full amount of the tax liability.

3. Effective Tax Administration.

Acceptance is permitted based on effective tax administration. An offer may be accepted based on effective tax administration when there is no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.

Taxpayers may choose to pay the offer amount in a lump sum or in installment payments.

A “lump sum offer” is defined as an offer payable in five (5) or fewer installments and within 24 months after the offer is accepted. If a taxpayer submits a lump sum offer, the taxpayer must include a nonrefundable payment equal to 20 percent of the offer amount with the Form 656.

A “periodic payment offer” is payable in six (6) or more monthly installments and within 24 months after the offer is accepted. When submitting a periodic payment offer, the taxpayer must include the first proposed installment payment with Form 656. Tthis payment is required in addition to the $150 application fee.

The amounts paid pursuant to a lump sum or periodic payment offers are also nonrefundable. These amounts are applied to the tax liabilities and the taxpayer has a right to specify the particular tax liabilities to which the periodic payments will be applied.

Other important facts to know:

1. The average Offer in Compromise Settlement takes between 6- 9 months (usually longer) to work by the IRS;
2. The average Offer in Comprise settlement is 14 cents on a dollar;
3. 38% of all offers in compromise are accepted by the IRS;
4. All accepted Offers in Compromise Settlements are a matter of public record;
5. The average time it take the IRS to work an Offer in Compromise is between ten (10) to twenty (20) hours.

If the IRS rejects an OIC, then the taxpayer will be notified by mail. The rejection letter will explain the reason that the IRS rejected the offer and will provide detailed instructions on how the taxpayer may appeal the decision to the IRS Office of Appeals. The appeal must be made within 30 days from the date of the letter. In some cases, an OIC is returned to the taxpayer, rather than rejected, because the taxpayer has not submitted necessary information, has filed for bankruptcy, has failed to include a required application fee or nonrefundable payment with the offer, or has failed to file tax returns or pay current tax liabilities while the offer is under consideration. A return is different from a rejection because there is no right to appeal the IRS’s decision to return the offer.

The IRS is not bound by either the offer amount or the terms proposed by the taxpayer. The OIC investigator may negotiate a different offer amount and terms, when appropriate. The investigator may determine that the proposed offer amount is too low or the payment terms are too protracted to recommend acceptance.

If you have questions about the IRS Offer-In-Compromise Program, call the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.