Tax
Preparation Offer in Compromise
 
Offer
in Compromise
If
taxpayers are unable to pay a tax debt in full, and an installment
agreement is not an option, then they may be able to take advantage of
the offer in compromise (OIC) program.
What
is an Offer in Compromise?
An
offer in compromise (OIC) is an agreement between a taxpayer and the
Internal Revenue Service that resolves the taxpayer's tax liability. The
IRS
has the authority to settle, or compromise, federal tax liabilities by
accepting less than full payment under certain circumstances. The
minimum offer amount must generally be equal to, or greater than, a
taxpayer's reasonable collection potential (RCP). The RCP is defined as
the total of the taxpayer's realizable value in real and personal
assets, plus future income.
The
IRS
may legally compromise for one of the following reasons: doubt as to
liability, when doubt exists that the assessed tax is correct; doubt as
to collectibility, when doubt exists that the taxpayer could ever pay
the full amount of tax owed; or effective tax administration. Under
effective tax administration, there is no doubt that the assessed tax is
correct and no doubt that the amount owed could be collected, but the
taxpayer has an economic hardship or other special circumstances which
may allow the
IRS
to accept less than the total balance due.
IRS
Policy Statement P-5-100 states:
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. An offer in compromise is a legitimate
alternative to declaring a case currently not collectible or to a
protracted installment agreement. The goal is to achieve collection of
what is potentially collectible at the earliest possible time and at the
least cost to the Government.
In
cases where an offer in compromise appears to be a viable solution to a
tax delinquency, the Service employee assigned the case will discuss the
compromise alternative with the taxpayer and, when necessary, assist in
preparing the required forms. The taxpayer will be responsible for
initiating the first specific proposal for compromise.
The
“Offer” made to settle a larger tax liability they cannot afford.
The “Offer” by a
qualified taxpayers must be adequate, consistent with their ability to
pay their tax debt. Taxpayers
are expected to provide required documentation to verify their ability
to pay. The ultimate goal is a compromise is to give taxpayers a fresh start.
In
order to be considered for an OIC, a taxpayer must have met all of the
following requirements:
- The
most current versions of Form 656, and Forms 433-A and 433-B,
"Collection Information Statements;"
- The
$150 application fee, or Form 656-A, "Income Certification for
Offer in Compromise Application Fee," with the Form 656;
- Filed
all required federal tax returns;
- Filed
and paid any required employment tax returns on time for the two
quarters prior to filing the OIC, and is current with deposits for
the quarter in which the offer in compromise was submitted; and
- Is
not a debtor in a bankruptcy case.
The
statute of limitations for collection of a tax debt is suspended while
an OIC is "pending," or being reviewed. The offer in
compromise is pending starting with the date an authorized
IRS
employee determines the Form 656, "Offer in Compromise,"
can be processed. The OIC remains pending until an authorized
IRS
employee accepts, rejects, returns, or acknowledges withdrawal of the
offer in writing. If a taxpayer appeals an OIC that was rejected,
the
IRS
will continue to treat the OIC as pending until the Appeals Office
accepts or rejects the OIC in writing.
In
order to avoid defaulting an OIC once it is accepted by the
IRS
, taxpayers must remain in compliance in the filing and payment of all
required taxes for a period of five years, or until the offered amount
is paid in full, whichever is longer. Failure to comply with these
conditions will result in the default of the OIC and the reinstatement
of the tax liability.
Taxpayers
may choose to pay the offer amount in a lump sum, in monthly payments
over the remainder of the statutory time allowed for collection, or a
combination of a lump sum and monthly payments. Generally, it is to the
taxpayer’s advantage to pay the amount in the shortest time possible
because longer payment terms will require a larger offer amount.
Ordinarily,
the statutory time allowed for collection is suspended during the period
the OIC is under consideration, and is extended further if the OIC is
later submitted to the Appeals Office. If the
IRS
grants a fresh start by accepting the OIC, it is expected the taxpayer
will have no further delinquencies. If taxpayers do not abide by all the
terms of the agreement -- including filing all future returns and making
all payments when required for 5 years or until the offered amount is
paid in full, whichever is longer -- their OIC may be declared in
default. If the
IRS
rejects the OIC, taxpayers will be notified by mail. In the
IRS
letter, it will explain the reason for the rejection and provide
detailed instructions on how to appeal the decision.
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