The IRS and the Offer in Compromise
The Federal Government, like other creditors, encounters situations where an accounts receivable cannot be collected in full or there is a legitimate dispute as to what is owed. It is an accepted business practice to resolve these issues through compromise. The Offer in Compromise is a tool that the Federal Government uses to collect unpaid taxes.
What is an Offer in Compromise (OIC?)
- An Offer in Compromise is an agreement between a taxpayer and the government that settles a tax liability for payment of less than the full amount owed.
- The Collection Division of the IRS handles most of the OIC cases for the Internal Revenue Service.
- The Examination Division will also handle certain type of OIC’s as discussed below.
What is the main objective of the Offer in Compromise?
- The objective of the Offer in Compromise program is to determine the amount of delinquent taxes that can reasonably be collected at the earliest possible time and at the least cost to the government with the following in mind:
- Achieve a resolution that is in the best interests of both the individual taxpayer and the federal government.
- Provide the taxpayer a fresh start toward future voluntary compliance with all filing and payment requirements.
- Secure collection of revenue dollars that may not be collected through any other means.
- Reduce the inventory of delinquent cases.
- Make sure the taxpayer becomes in full compliance with all future years.
Collection Function of the Internal Revenue Service
The Collection function is responsible for processing and investigating two types of Offers in Compromise:
- All offers based on Doubt as to Collect-ability, including proposed liabilities still subject to settlement in Examination or Appeals.
- All offers based on Effective Tax Administration. These offers are rare in number.
Examination Function of the Internal Revenue Service
The examination function is responsible for processing and investigating offers submitted based on Doubt as to Liability.
The IRS may not have the authority to accept an Offer in Compromise when:
- Questions concerning the amount of the taxpayers liability or the collection of the liability for all or part of the periods the taxpayer owes is in litigation.
- The federal tax liability for all or part of the periods the taxpayer owes has been reduced to a judgment. Judgment periods are different in most states so you must check on a state by state basis.
- If an offer is received that covers tax periods for which restitution was ordered, the IRS cannot accept an OIC that in any way modifies the terms of a restitution order. The IRS may consider an OIC for periods for which restitution was ordered only if the defendant has paid or will pay the full amount of the restitution as part of the offer.
- The IRS has a civil or criminal prosecution pending against the taxpayer in the Department of Justice or United States Attorneys Office. Acceptance by the IRS is dependent upon the Department of Justice accepting a related offer or settlement.
District Counsel Office
District Counsel attorneys provide opinions on OIC’s recommended for acceptance when the total liability, including additions and accrued penalty and interest, is $50,000 or greater. District Counsel Office, when requested, will provide legal opinions for matters related to investigation and processing of offers in compromise.
Taxpayer Advocate Service of the Internal Revenue Service
The Taxpayer Advocate Service is an independent organization within the IRS whose employees assist taxpayers in solving tax problems that have not been resolved through normal channels, or who are experiencing significant hardships. IRS employees who work as taxpayer advocates may request expedited processing of an Offer in Compromise if they deem such action necessary.
Taxes, Penalties, and Interest Constitute One Liability
An Offer in Compromise is effective for the entire assessed liability of tax, penalties, and interest for the years or periods covered by the offer. All questions of tax liability for the years or periods covered by the agreement will be settled. Neither the taxpayer nor the federal government can reopen a compromised tax year or period unless there was falsification of information or documents, concealment of ability to pay and/or assets, or a mutual mistake of a material fact which would be sufficient to set aside or reform a contract.
Tax Liability that has not yet been assessed
- The Internal Revenue Service will not consider an offer that is solely for a tax period or tax year that has not been assessed unless the IRS computer system indicates a return has been received or an assessment is pending. A simple computer check is made to find out if this is so.
- Taxpayers may submit, and the internal Revenue Service must consider, an offer to compromise taxes due on tax returns which have been filed but have not yet been assessed. However, before the offer can be accepted, the taxes must be assessed.
Application Fees applicable to Offers in Compromise
- Effective November 1, 2003, the Internal Revenue Service began charging an application fee.
- The application fee applies only to certain offers processed.
The Tax Increase Prevention and Reconciliation Act of 2005
- On May 17, 2005 Congress passed the Tax Increase Prevention and Reconciliation Act of 2005 that was was enacted on May 17, 2006, which made major changes to the offer in compromise program. These changes become effective for all offers received by the Internal Revenue Service starting July 16, 2006.
- Under the new law, taxpayers submitting requests for lump sum cash offers must include with the offer a payment equal to 20% of the offer amount. The payment is treated as a payment of tax and is nonrefundable. That is, it will not be returned even if the offer is deemed to be not processable, later returned or rejected. A lump sum cash offer means any offer of payments made in five or fewer installments.
- Taxpayers submitting requests for periodic payment offers must include the first proposed installment payment with their application. A periodic payment offer is any offer made in six or more installments. The taxpayer is required to pay additional installments while the offer is being evaluated by the IRS. All installment payments are nonrefundable, even if the Offer is deemed not processable, later returned or rejected.
- Under the new law, taxpayers that qualify as low-income, based on current criteria, and submit a Form 656-A, will not have to submit the application fee.
- If the IRS cannot make a determination on an OIC within two years, then the offer will be deemed accepted. If a liability included in the offer amount is disputed in any court proceeding, that time period is omitted from calculating the two-year period. Once a determination letter is issued by the Offer Investigator, the 24 month time frame will be considered stopped. The 24 months does not include the time in Appeals.
- Offers in compromise requests are submitted using Form 656, Offer in Compromise. The form provides detailed instructions for completing an offer and includes all of the necessary financial forms. When submitting Form 656, taxpayers must include an application fee of $150, depending on the type of offer, unless they qualify for the low-income exemption or are filing a doubt-as-to-liability offer.
Amount Offered to the IRS for the OIC
The total amount of money offered on the Form 656, must be indicated. The amount offered may not include money already paid, expected future refunds, funds attached by levy, or anticipated benefits from capital/net operating losses.
- Taxpayers are expected to pay the entire amount offered in as short a time as possible. Acceptable offer terms should be determined by the IRS Agent and should not be limited to the proposal of the taxpayer. The IRS will often look to expand the financial terms of the Offer.
- The amounts and due dates of payments must be specified.
- There are three (3) types of payment terms that the Service and the taxpayer may agree to:
- Lump Sum Cash — Payable in five or fewer installments from notice of acceptance; must be accompanied by a payment of 20% of the offered amount.
- Short Term Periodic Payment — Payable in six or more installments within 2 years from the IRS received date. It must be accompanied with the first proposed installment, and additional installments must be paid in accordance with the taxpayer’s proposed offer terms while the Service evaluates the offer. If an amended offer is secured, the 24-month period begins the date the offer is accepted.
- Deferred Periodic Payment — Payable in six or more installments 25 or more months from the IRS received date, but within the time remaining on the statutory period for collection. It must be accompanied with the first proposed installment, and additional installments must be paid in accordance with the taxpayer’s proposed offer terms while the Service evaluates the offer.
- A taxpayer may designate payments of pre-acceptance to a specific liability including trust fund. Once the offer has been accepted, the funds are applied in the government’s best interest and the taxpayer no longer has the right to designate payments.
- If an Offer in Compromise is rejected you may file another Offer In Compromise.
- Taxpayers must agree to all the standard conditions of the agreement as they are printed on the Form 656.
- Taxpayer should be aware of compliance issues, which require that tax returns are timely filed and the tax due is paid for the next 5 years.
Interest on the Compromise Amount
- For all offers accepted after December 31, 1999, interest on the compromise amount is also compromised.
- For all offers accepted before January 1, 2000, interest continues to accrue until the compromise amount is paid in full.
Acceptance Rates of the Offers in Compromise
The Offer in compromise rate of acceptance is about 25%. 11,000 Offers were accepted in 2009 by the Internal Revenue Service.
Tax Professional Rates of Acceptance
While there are no figures on this, my guess is the rate of acceptance of a true professional tax resolution company is around 75%.