I am a former IRS revenue officer who both worked the offer in compromise program and taught the offer in compromise program at the regional training center in Atlanta Georgia.
Tax Fact – 38% of all offers in compromise filed are accepted by the IRS for an average of $.14 on a dollar
In short I am an expert on the offer in compromise.
There are five cardinal rules to get your offer in compromise accepted by the Internal Revenue Service. Please understand even know I’m listing only five, there are other issues that may arise and come up and I would recommend taxpayers who wish to settle their IRS tax debt through an offer in compromise hire professional tax firm unless you have an extremely simple case.
In speaking to IRS agents who are currently working the offer in compromise program they stated to me directly that about 90% of all the offers accepted were submitted through professional firms.Simply because repetition is the mother of success.
The offer in compromise a very specific process.
Unless you have worked hundreds of these cases you do not understand the complexities that are involved in most of the cases.
I recommend anyone wanting to settle their case with the Internal Revenue Service hire a seasoned tax professional whether it’s us or another tax firm. It is well worth your money.
Cardinal rules of the offer in compromise.
1. Walk-through the IRS pre-qualifier tool first – there is an IRS pre-qualify your tool that you can find on our website. Make sure that you are settling for the lowest dollar amount. Walk through the pre-qualifier tool or call us today and we will qualify you for an initial assessment.
2. Make sure all offers are filled out completely – being a former IRS agent I can tell you it is much easier for the IRS agent to reject your offer than accept your offer.
IRS has the right to send your offer in compromise back if it is not filled out correctly. Do not give IRS a reason to reject your offer. As simple as this statement sounds you’d be surprised the number of offers in compromise that come back because they are not filled out correctly.
3. Well-documented forms- many offers get rejected because the forms are not well documented. This is another reason IRS will reject your offer. It is critical that everywhere that you write a number to have it documented with support or information that supports the information you are providing the Internal Revenue Service.
4. Packaging- at the end of the day it’s all about packaging.
IRS wants to see a nice neat package with no loose ends.
The offer must make sense. If there are unusual circumstances or facts that surround your financial condition have them documented with a statement or note that paint the condition of your case.
Paint a picture of your financial condition with the summary statement so the agent has an idea of the true facts of your case. Remember the agent will never meet you they only learn about you through the paperwork and forms you fill out.
5. Be patient, be persistent and appeal if necessary -Because IRS rejects offer so easily, if you think you have an offer that should have been accepted plan to appeal.
As a general rule is easier to get IRS to accept your offer and the appellate process.
Also be patient in hearing from IRS. Right now there are over 7500 cases in the queue that are not being work because of manpower.
Offers in compromise are just stacked up and that’s why it is critical your packaging is filled out correctly so the IRS can easily go ahead and put an accepted stamp on it.
What is The 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.
IMPORTANT NOTE : 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:
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.
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 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. This is why it is helpful to walk to the IRS pre-qualifier tool so you recognize what it takes to get your offer in compromise through
The IRS may accept an OIC based on three grounds.
1. Acceptance is permitted if there is doubt as to liability.
This ground is only met when there is a genuine dispute as to the existence or amount of the correct tax debt under the law.
2. Acceptance is permitted if there is doubt that the amount owed is fully collectible.
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. 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.
These are very difficult offers in compromise to get accepted and when they are they usually get accepted because of medical conditions and those must be very well documented.
How to Submit an Offer in Compromise
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, 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). Form 656 can be found in the Offer in Compromise Booklet, Form 656-B (PDF).
Applicable Application Fees
A taxpayer must submit a $186 application fee with the Form 656. Do not combine this fee with any other tax payments.
There are, however, two exceptions to this requirement.
1. No application fee is required if the OIC is based on doubt as to liability.
2. 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.
Two types of payment plans for offer in compromise
The Lump Sum Offer
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 within 5 or fewer 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 $186 application fee.
The 20 percent payment is “nonrefundable” meaning it will not be returned to the taxpayer even if the offer is rejected or returned to the taxpayer without acceptance. Instead, the 20 percent payment 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 payment.
The periodic payment offer
An 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 $186 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.
Statutory time to collect
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
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.
OIC is in default
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.
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.
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 (less payments made), 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.
Rejection of an Offer in Compromise
If the IRS rejects an OIC, 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.
Offer in Compromise – How to Settle Your IRS Tax Debt, Former IRS Settlement Officer
