There are many options available for Taxpayers who owe debts to the IRS. Despite the temptation to just bury your head in the sand and ignore the letters piling up with scary legal jargon and huge dollars amounts, inaction is the worst possible response in this situation. There are installment agreements and other programs available – but some Taxpayers may not find these solutions feasible. These Taxpayers may benefit from a program known as an Offer in Compromise.
Offer in Compromise Defined
The IRS Offer in Compromise program allows taxpayers to settle their tax liabilities for less than what they owe. The authority to accept less than what is owed is granted by 26 U.S. Code § 7122. Under this statute, taxpayers may submit offers to settle their tax debts through a lump-sum payment or a finite number of periodic payments. If a taxpayer submits an Offer in Compromise to the IRS for a lump-sum, he or she will be required to submit an initial payment with the offer. People who submit periodic payment offers in compromise must submit the amount of the initial periodic payment with their offers.
Under IRM 5.8.1, the IRS will accept an Offer in Compromise when it deems the tax liability to be otherwise uncollectible. It may also agree to an Offer in Compromise when there is doubt about the liability owed and to support the effective administration of taxes. The goal of the OIC program is to negotiate a legal payment agreement that is in the taxpayer’s and IRS’s best interest.
Doubt about collectability
The first requirement for approving an offer of compromise is question of the IRS’s ability to collect the tax debt due to the taxpayer’s inability to pay. Doubt about the collectability of tax debt may be shown when a taxpayer’s income and assets are insufficient to satisfy the full tax liability. This is the most common Offer in Compromise.
Under IRS Policy Statement P-5-100, “The Service will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential”. However, the amount that the taxpayer offers must be what the IRS believes that it could collect using judicial and administrative remedies. The amount that the IRS believes is collectible is called the reasonable collection potential. To calculate the RCP, the IRS analyzes the basic living expenses of the taxpayer.
How much should I offer in compromise to the IRS?
The Offer in Compromise program was created to help taxpayers who are unable to pay their tax debt without suffering economic hardship. IRS Offer in Compromise statistics are enlightening. In 2020, the IRS received 44,809 offers in compromise and accepted 14,288. The total value of the accepted offers was $158,013,000. As you can see from this data, the Offer in Compromise can be an incredible solution for many taxpayers, it is also important to recognize that the IRS rejected over twice as many offers as it accepted last year. These statistics demonstrate the importance of analyzing the numbers and preparing a reasonable case before submitting an offer.
If you have an unpaid tax liability, you will need to demonstrate that you are unable to pay the full amount owed, you do not owe the disputed amount, or that special circumstances exist that make acceptance of the offer in the IRS’s and the taxpayer’s best interests. In general, the IRS will be likelier to accept an offer when it is the greatest amount of money that the IRS could reasonably expect to collect within a reasonable period. The first step in evaluating whether the OIC program is a good tax resolution choice for you is to consider the eligibility requirements.
Eligibility requirements for an Offer in Compromise
A taxpayer must meet all of the following requirements to be eligible for the OIC program:
- No unfiled tax returns
- Has been billed for one or more tax debts that are included in the offer
- Makes current estimated tax payments
- For business owners with employees, makes current quarterly tax deposits
The IRS will also consider several factors when it assesses whether a taxpayer would encounter financial hardship if he or she was forced to pay the entire liability, including his or her income, assets, expenses, and lifestyle. In considering a taxpayer’s lifestyle, the IRS will review all relevant information.
When a taxpayer submits an Offer in Compromise to the IRS, he or she will be required to complete and submit IRS Form 656, IRS Form 433-A, and/or IRS Form 433-B for businesses. While a lot of the information about the taxpayer’s finances will be collected from the data on Form 433, the IRS employee examining the claim will also conduct an investigation. Any unusually high living expenses will need to be justified. However, the IRS will not necessarily force a taxpayer to sell a vehicle or home to satisfy his or her tax liability. For taxpayers who have luxurious lifestyles, installment agreements may be a better option than submitting an Offer in Compromise.
Calculating the reasonable collection potential
If you meet the eligibility requirements and appear to qualify for the OIC program, you will want to calculate the reasonable collection potential to determine the amount that should be offered. IRM 5.8.4.3.1 provides guidance about how the IRS calculates the RCP for a taxpayer’s Offer in Compromise.
To calculate the RCP, you will need to figure out the net equity that is realizable in your assets. This amount will then be added to the amount of your future income. To determine the net realizable equity, you will need to determine the fair market value of the various types of property. Then, you will need to apply any discounts from a quick sale to the property and deduct any loans that are secured against the property. This step might require you to retain an appraiser to receive a formal analysis of the property’s fair market value.
To calculate your future income, you will need to complete Section 7 of Form 433-A. Here, you will enter your income and your living expenses. The expenses that you claim might be very different than what the IRS normally accepts. The IRS relies on national and local standards when it calculates the RCP. After applying the standards, the amount left over after subtracting expenses from your income is called remaining income.
For a lump sum offer, you multiply remaining income by 12. For a periodic payment offer, you multiply remaining income by 24. This number is then added your asset number to arrive at your minimum offer amount.
Steps in the OIC process
Understanding the IRS rules for the OIC process is critical. To begin, all tax liabilities must be included in your Offer in Compromise.
1. Prepare and submit any unfiled returns.
It is necessary to prepare any unfiled tax returns so that the full amount of liability will be known. If there are any trust fund recovery penalties or withholding taxes at issue, you will also need to complete assessments for each quarter you may have a liability for. The IRS will not accept an offer from a taxpayer who is currently not in compliance.
2. Prepare and submit the correct IRS Offer in Compromise form.
Submitting an Offer in Compromise requires you to use the correct IRS Offer in Compromise form. You will need to submit IRS Form 656 together with Form 433-A. If you’re a business owner, you may also need to submit Form 433-B. IRS Publication 1854 contains information about how these forms should be completed.
3. Choose a lump-sum or deferred payment offer.
The IRS prefers that taxpayers make lump-sum cash offers. If you cannot make a lump-sum payment, the IRS may allow you to enter into an installment agreement. Under IRM 5.8.2.3, making a cash offer means paying the offer within five payments after you receive notification that the IRS has accepted the offer. While submitting a deposit with a lump-sum Offer in Compromise is not required, it is strongly encouraged.
Deferred or periodic payment offers include those when any portion of the amount that the taxpayer offers will be paid more than six months after the offer is accepted. In general, a deferred payment offer will not be extended for more than two years after acceptance. If you make an acceptable offer that will be paid within two years or less, it should not be rejected unless there are exceptional circumstances that establish the need for a shorter repayment period. If you need to make a deferred payment offer, the term should be clearly stated.
IRS Response to an Offer in Compromise
Once received, the IRS Revenue Officer will complete an initial screening to determine whether the offer can be processed. The IRS sends back many offers that it determines not to be processable, which can be very frustrating. Under IRM 5.8.2.4, the following circumstances will result in a determination that an offer is not processable:
- Lack of an offer amount
- Unidentified taxpayer
- Unidentified liabilities
- Missing signatures
- Failure to submit financial statements
- Net equity is not reasonably reflected in the offer
- Use of an old Form 656
- Altered or deleted terms
If an Offer in Compromise is returned because it is not processable, the taxpayer will not be able to file an appeal with the IRS Appeals Office. However, there is a process for correcting a deficient or incomplete offer package.
If an offer is determined to be processable, it will be forwarded to an Offer Examiner. The assigned examiner will carefully review all documents that have been submitted line-by-line to look for red flags. An investigation will also be completed into the taxpayer’s financial circumstances. If the Offer in Compromise is approved, a notification will be sent. The taxpayer will then have to honor the offer that he or she has made within the specified time frame.
What happens when an OIC is accepted?
If the IRS accepts an Offer in Compromise, a contract is formed. The contract is binding on the taxpayer and the IRS and prevents further inquiry into the matter. Unless a mutual mistake or fraud led to the contract, both parties will be denied any attempt to recover any of the consideration that was given. However, an Offer in Compromise that was accepted because of a mutual mistake about a material fact or because of false representations about material facts can be set aside.
An accepted Offer in Compromise will include the IRS’s agreement to accept the offer as a full settlement of the taxpayer’s liability. It will also include the taxpayer’s agreement to pay the offered amount and the IRS’s release of liens that have been filed. Other promises are included in an accepted Offer in Compromise, including the promise to remain in compliance with the tax laws for the subsequent five years as previously described. The taxpayer will also agree to offset any tax refund that he or she might be due for the current or previous years. If the taxpayer receives a tax refund for the year in which the offer is accepted, the taxpayer must return it. If he or she fails to do so, the offer may be retroactively denied, and the tax liability reinstated.
When an Offer is Rejected
If an offer is deemed to be processable but is subsequently denied after an investigation, the taxpayer can request an independent review. This review is conducted by the IRS Appeals Office. The notification that is sent by the IRS when an offer is rejected will include information about how to request the independent review. The taxpayer must file a written protest of the IRS’s decision within 30 days. This written protest can be sent on Form 13711. You can include new information with the written protest for evaluation by the examiner. However, the case file and protest are frequently just forwarded to the Appeals Office.
Under IRM 8.23.4, examiners also prepare Form 1271, which is a rejection memorandum. It includes a narrative report explaining why the Offer in Compromise was rejected. If the offer was based on doubt about collectability, the narrative will include detailed facts about an acceptable amount and term. This might be used as a basis for negotiation during an appeal.
You will not be sent this form upon the rejection. Because of its value in preparing for an appeal or creating a new offer, however, you should try to secure a copy either by making a request under the Freedom of Information Act or by asking the offer examiner directly for a copy.
When you file your appeal, you must include the specific grounds. You will need to compare your Form 433-A with the income and expense and asset tables. You should include supporting documents for each point of disagreement that you identify.
If your case qualifies, an appeals conference will be scheduled. This conference is an informal process and is conducted through correspondence, phone, or an in-person meeting. The appeals office focuses on trying to settle tax controversies before they reach litigation. In many cases, a rejected Offer in Compromise can be renegotiated and settled through the IRS Appeals Office.
Negotiating an Appeal
If you will decide to appeal a denial of your Offer in Compromise, you will need to gather evidence and records to support your position. During the appeal, the Appeals Officer will communicate with you. To win your appeal, you need to be prepared with your documentation.
Appeals Officers are prohibited from communicating with the examiner who rejected your offer. This allows you to present your original case to the Appeals Officer if you believe that it is supported with enough evidence. You can also make the case stronger by submitting additional evidence before it is sent to Appeals.
The Offer in Compromise program offers taxpayers an opportunity for a fresh start. However, the IRS rejects a far greater number of offers than it accepts each year. You should carefully consider if an OIC is your best strategy, or other forms of resolution are more applicable for resolving your outstanding tax liabilities. If you qualify and determine you are eligible, paying careful attention while you are completing the forms and assembling all of the supporting documents can increase the chances that your Offer in Compromise package will be accepted. Taxpayers also need to ensure they remain in compliance with their current tax return and for years after the acceptance. By meeting these requirements, you can enjoy a new start while receiving relief from your outstanding tax debt.
Filing and Professional Assistance
The Offer in Compromise process can be very straightforward for many tax debtors, especially if you have no significant assets and are low income. Visit the IRS OIC website to begin. Other taxpayers can still qualify for an Offer, but the process becomes much more complicated. In these cases, Contact us today for an initial financial consultation and we can see if an Offer in Compromise is right for you!