OFFERS IN COMPROMISE
Under Internal Revenue Code Section 7122(a) the IRS has discretion to compromise any civil liability for taxes, interest and penalties. A taxpayer unable to pay his full liability may be able to obtain a settlement discharging all liabilities upon payment of a discounted settlement amount. This settlement program is widely used although it should be said, as a general statement, that the IRS does not easily walk away from existing liabilities because of an inability to pay. The underlying question in the IRS sense of the taxpayer’s ability to pay more before the statute of limitation runs its course.
There is a second type of Offer in Compromise which is seldom used but with the right set of taxpayer facts can be successful. This Offer in Compromise program also allows a post assessment settlement program for taxpayers who disagree with existing tax assessments. An OIC request can be filed to challenge existing tax liabilities. This is referred to as an Offer in Compromise based upon “doubt as to liability”. This office has had success with offers based on Doubt as to Liability. However, excellent taxpayer documentation of the correct tax liability (offered amount) is mandatory.
The following comments apply only to offers submitted to compromise an existing tax liability for reasons of inability to pay the entire tax balance – “doubt as to collectability”.
Doubt as to collectability exists when a taxpayer demonstrates that he/she is unable to fully pay all existing tax liabilities through a liquidation of all assets and/or entering into a monthly installment payment agreement based upon available cash flow. In other words, the taxpayer’s reasonable collection potential is less than the tax liability. Regulation Section 301.7122.1(b)(2). Net equity in the taxpayer’s residence is considered “as available” and discounted in value because of the general policy that the IRS will not foreclose on a taxpayer’s residence.
There are also “special circumstances” cases in doubt as to collectability cases. Economic hardship or public policy factors can justify acceptance of an OIC for less than reasonable collection potential. Treasury Regulation 301.7122.1(b)(3) indicates that offers will be accepted under the “Effective Tax Administration” program where circumstances call for a different and lenient treatment of the taxpayer. This office has found the IRS not disposed to entertain submissions based on effective tax administration. We are only aware of several successful such submissions.
OIC Payment Arrangements
- Lump sum. The offer will be paid over the course of several months after acceptance. This office has used payment within ninety days of acceptance regularly. The taxpayer must initially include a down payment of 20% of the offered amount as well as $186 processing fee.
- Short term deferred. The offer will be paid over a period of 6 to 24 months. The offer must be accompanied by the first installment payment and, during the processing period, regular monthly installments must be continued. If the offer is rejected payments made will not be refunded.
- Deferred payment period. The monthly payment stream is over the remaining life of the collection statute of limitations. If the offer will be paid for a period longer than 24 months the offer must be accompanied by the first installment with continuing regular monthly payments. Installment payments will not be refunded upon rejection or breach of the offer.
- If the Service fails to act on an offer within two years of submission, it will be deemed accepted.
- Once an Offer in Compromise (Form 656) is accepted for processing an IRS collection hold is placed on levy action against the taxpayer until OIC negotiations resulted in a final decision.
- Offers will not be accepted for processing if the offer did not include an application fee and down payment/first payment with the submission. Nor will an offer be accepted if the taxpayer is currently not in compliance with regulations, e.g., unfiled returns or lack of estimated tax payment for the current year.
- The IRS will not accept an offer application when the taxpayer is in a bankruptcy proceeding.
- Recently mediation and arbitration forums are available in Offer in Compromise cases. IRS announcement 2008-111, 2008-48 IRB 1224. This can be extremely important as Offer in Compromises units are overworked and are prone to find reasons for rejected an offer very quickly. Mediation/arbitration forces the taxpayer to face realities of his ability to pay. It also forces the Internal Revenue Service to spend material amounts of preparation time and take reasonable positions.