I am a former IRS agent, teaching instructor and have both worked and taught the IRS offer in compromise/tax settlement program at the Internal Revenue Service.
Last year the Internal Revenue Service received 58,000 offers in compromise and accepted 38% of all offers filed.
In speaking to an agent who works the offer in compromise program they stated that 90% of all those offers that were accepted were prepared and represented by a professional tax firm.
I highly recommend that a professional firm prepare and submit your offer in compromise because true professionals understand the criteria and the special nuances of the offer program. The offer in compromise program is not for everybody.
A true tax professional will save you thousands of dollars and settle your case the first time around. The other reason you do not want to self prepare is the simple reason that you don’t want expose yourself to the Internal Revenue Service when it is unmerited. If the Internal Revenue Service rejects your offer in compromise it gives them a complete roadmap to your assets and ability to pay.
I am a former IRS agent who was a teaching instructor for over 10 years at the Internal Revenue Service. I actually taught the offer in compromise tax settlement program in the local and regional tax offices of the IRS. My advice to you spend the money and hire a true professional tax firm one and is credentialed and has a high Better Business Bureau rating.
In the last three years the Internal Revenue Service is making great strides to help taxpayers deal with their back IRS debt.
To the new Fresh Start program or Fresh Start initiative offered by the IRS shows that the IRS is reaching out to taxpayers and wanting them to settle their tax debt if they qualify through the offer in compromise program.
Before taxpayers go trying to settle their debts through the offer in compromise, taxpayer should be asked a lot of questions to the representatives they hire or screen to make sure that they are a qualified candidate for the offer in compromise program.
Once again, not all taxpayers qualify for the program.
To make sure taxpayers understand the qualifications of the offer and compromise program, the Internal Revenue Service has made available to everyone a pre-qualifier tool.
You can find that pre-qualifier tool on our website.
I would suggest any taxpayer contemplating the settlement of an offer in compromise with the Internal Revenue Service to walk through the program before they give their money to any tax firm to do so.
Taxpayer should also be aware that the Internet is full of splash page advertising promising tax settlements for the offer and compromise program, they claim they can settle for pennies on the dollar.
Most of these firms offering such claim are companies in business today and gone tomorrow.
Taxpayers need to ask a lot of questions and more specifically they need to speak to the person that may be working their case to settle their tax debt for pennies on the dollar. Do not be tricked into talking into a fast talking salesperson about settling your case because it sounds real good.
I would recommend that all taxpayers check for the Better Business Bureau ratings, check for the company’s credentials, ask the company about similar cases that were worked what settlement was reached and ask to speak to the person directly that will be working their case within the firm.
As far as pricing goes, most offer in compromises from true tax professional companies will range anywhere from $4-$7500 based on the complexity of the case.
There are very few easy offers in compromise cases and most needs require a high degree of expertise to settle the case.
How to Settle with the IRS with a Offer in Compromise
To find out how to settle with the Internal Revenue Service read the following and find out the tax protocols in dealing with the offer in compromise.
What is a Offer in Compromise
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 liabilities can be fully paid through an installment agreement or other means, the taxpayer will in most cases not be eligible for an OIC.
In order to be eligible for an OIC, the taxpayer must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.
In most cases, the IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (the RCP). The reason for this is quite simple, the IRS can just sees the asset and collect the full value.
The RCP is how the IRS measures the taxpayer’s ability to pay.
The RCP includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.
Most offers in compromises take any where between 20 hours to work by an IRS agent. Also if an the offer and compromise is accepted it becomes a matter of public record and is available for public inspection.
The IRS may accept an OIC based on three grounds.
First, acceptance is permitted if there is doubt as to liability. This ground is only met when genuine doubt exists under applicable law that the IRS has correctly determined the amount owed.
Second, 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.
Third, acceptance is permitted based on effective tax administration.
An offer in compromise 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.
You should know that the IRS receive very few offers based on exceptional circumstances. These are extremely hard offers to get IRS to accept.
A good example of an exceptional circumstance OIC would be somebody that is undergoing cancer and may not have a long time to live.
When submitting an OIC based on doubt as to collectibility or based on effective tax administration taxpayers must use the most current version of:
- Form 656 (PDF), Offer in Compromise,
- and also submit Form 433-A (OIC) (PDF), Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or
- Form 433-B (OIC) (PDF), Collection Information Statement for Businesses.
A taxpayer submitting an OIC based on doubt as to liability must file:
- a Form 656-L (PDF), Offer in Compromise (Doubt as to Liability), instead of Form 656 and Form 433-A (OIC) and/or Form 433-B (OIC).
In general, a taxpayer must submit a $150 application fee with the Form 656. Do not combine this fee with any other tax payments.
There are, however, two exceptions to this requirement.
First, no application fee is required if the OIC is based on doubt as to liability.
Second, the fee is not required if the taxpayer is an individual (not a corporation, partnership, or other entity) who qualifies for the low-income exception.
This exception applies if the taxpayer’s total monthly income falls at or below 250 percent of the poverty guidelines published by the Department of Health and Human Services. Section 4 of Form 656 contains the Low Income Certification guidelines to assist taxpayers in determining whether they qualify for the low-income exception.
A taxpayer who claims the low-income exception must complete section 4 of Form 656.
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 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 with the Form 656 a nonrefundable payment equal to 20 percent of the offer amount.
This payment is required in addition to the $150 application fee.
The 20 percent amount is called “nonrefundable” because it cannot be returned to the taxpayer even if the offer is rejected or returned to the taxpayer without acceptance. The 20 percent amount will be applied to the taxpayer’s tax liability. The taxpayer has a right to specify the particular tax liability to which the IRS will apply the 20 percent amount.
The offer is called a “periodic payment offer” under the tax law if it is payable in 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 along with the Form 656.
This payment is required in addition to the $150 application fee.
This amount is nonrefundable, just like the 20 percent payment required for a lump sum offer.
Also, while the IRS is evaluating a periodic payment offer, the taxpayer must continue to make the installment payments provided for under the terms of the offer. These amounts 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.
Ordinarily, the statutory time within which the IRS may engage in collection activities is suspended during the period that the OIC is under consideration and is further suspended if the OIC is rejected by the IRS and where the taxpayer appeals the rejection to the IRS Office of Appeals within 30 days from the date of the notice of rejection.
If the IRS accepts the taxpayer’s offer, 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 OIC, the IRS may determine that the OIC is in default. Should the offer in compromise the fault the taxpayer account will return immediately to the field workforce collections actions will take place. It is though no offer was ever accepted by the Internal Revenue Service and the taxpayer must start all over again.
For doubt as to collectibility and effective tax administration OICs, the terms and conditions include a requirement that the taxpayer timely file all tax returns and timely pay all taxes for 5 years from the date of acceptance of the OIC.
If a Offer in Compromise Defaults
When an OIC 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.
Additionally, any refunds due within the calendar year in which the offer is accepted will be applied to the tax debt. Remember you must keep current with the Internal Revenue Service for the preceding five years or IRS will default your offer in compromise.
If your offer in not accepted, Appeal
If the IRS rejects an OIC, then the taxpayer will be notified by mail. The 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.
It requires a lot of skill to deal with an offer in compromise. I would highly recommend any taxpayer contemplating the filing of an offer in compromise contacted true tax professional.
Remember 38% of all offers in compromise are accepted by Internal Revenue Service.
How to Settle with IRS with through a Offer in Compromise – Former IRS Offer Specialist
