The IRS and the Offer in Compromise
Negotiating Your Future: The IRS and the Offer in Compromise
The IRS and the Offer in Compromise
Similar to other creditors, the Federal Government may face situations where they are unable to recover the full amount of an accounts receivable or there is a genuine disagreement as to the amount owed. Typically, such concerns can be resolved by arriving at a mutually satisfying solution. The Federal Government avails Offer in Compromise as a means to recover unpaid taxes.
WHAT IS AN OFFER IN COMPROMISE (OIC?)
- An Offer in Compromise is an agreement between a taxpayer and the government that settles a tax liability for payment of less than the full amount owed.
- The Collection Division of the IRS handles most of the OIC cases for the Internal Revenue Service.
- The Examination Division will also handle certain type of OIC’s as discussed below.
WHAT IS THE MAIN OBJECTIVE OF THE OFFER IN COMPROMISE?
The objective of the Offer in Compromise program is to determine the amount of delinquent taxes that can reasonably be collected at the earliest possible time and at the least cost to the government with the following in mind:
- Achieve a resolution that is in the best interests of both the individual taxpayer and the federal government.
- Provide the taxpayer a fresh start toward future voluntary compliance with all filing and payment requirements.
- Secure collection of revenue dollars that may not be collected through any other means.
- Reduce the inventory of delinquent cases.
- Make sure the taxpayer becomes in full compliance with all future years.
COLLECTION FUNCTION OF THE INTERNAL REVENUE SERVICE
The Collection function is responsible for processing and investigating two types of Offers in Compromise:
- All offers based on Doubt as to Collect-ability, including proposed liabilities still subject to settlement in Examination or Appeals.
- All offers based on Effective Tax Administration. These offers are rare in number.
EXAMINATION FUNCTION OF THE INTERNAL REVENUE SERVICE
The examination function is responsible for processing and investigating offers submitted based on Doubt as to Liability.
The IRS and the Offer in Compromise
THE IRS MAY NOT HAVE THE AUTHORITY TO ACCEPT AN OFFER IN COMPROMISE WHEN:
- Concerns regarding the amount of the taxpayer’s liability or the collection of that liability for all or some of the periods owed may be in litigation.
- The federal tax liability for all or part of the periods the taxpayer owes might have been converted into a judgment. Judgment periods vary among states, so it is essential to verify on a state-by-state basis.
- If the IRS receives an offer that includes tax periods for which restitution has been ordered, they cannot accept an Offer in Compromise (OIC) that alters the terms of a restitution order in any way. The IRS may consider an OIC for periods where restitution was ordered only if the defendant has paid or commits to pay the full restitution amount as part of the offer.
- Should the IRS have a civil or criminal prosecution pending against the taxpayer in the Department of Justice or United States Attorney’s Office, acceptance is contingent upon the Department of Justice agreeing to a related offer or settlement.
DISTRICT COUNSEL OFFICE
The District Counsel lawyers offer their recommendations regarding the approval of OIC’s when the total liability (including interest and penalties) is above $50,000. If required, they can also provide legal guidance related to the investigation and handling of OIC’s.
TAXPAYER ADVOCATE SERVICE OF THE INTERNAL REVENUE SERVICE
The Taxpayer Advocate Service (TAS) operates independently within the IRS and provides assistance to taxpayers who have been unable to resolve their tax issues through normal channels or are facing significant hardships. If an IRS employee working for TAS believes that expediting an Offer in Compromise (OIC) is necessary for the taxpayer’s case, they can request for it to be processed sooner.
TAXES, PENALTIES, AND INTEREST CONSTITUTE ONE LIABILITY
If you opt for an Offer in Compromise, the agreement covers all assessed tax, penalties and interest for the specified years or periods. This means that all tax liability disputes within those agreed years are resolved. Neither the taxpayer nor the government can reopen the compromised tax year or period unless information or documents were falsified, the ability to pay and/or assets were concealed, or a mutual mistake of material fact occurred. These situations warrant contract nullification or reform.
TAX LIABILITY THAT HAS NOT YET BEEN ASSESSED
- The Internal Revenue Service will not entertain an offer related only to a tax period or tax year that hasn’t been assessed, unless the IRS computer system shows a return has been received or an assessment is imminent. A basic computer check is performed to determine this.
- Taxpayers are allowed to propose, and the Internal Revenue Service is obliged to evaluate, an offer to settle taxes owed on tax returns that have been submitted but not yet assessed. However, before the offer can be accepted, the taxes must be officially assessed.
APPLICATION FEES APPLICABLE TO OFFERS IN COMPROMISE
- Effective November 1, 2003, the Internal Revenue Service began charging an application fee.
- The application fee applies only to certain offers processed.
THE TAX INCREASE PREVENTION AND RECONCILIATION ACT OF 2005
- On May 17, 2005 Congress passed the Tax Increase Prevention and Reconciliation Act of 2005 that was was enacted on May 17, 2006, which made major changes to the offer in compromise program. These changes become effective for all offers received by the Internal Revenue Service starting July 16, 2006.
- Under the new law, taxpayers submitting requests for lump sum cash offers must include with the offer a payment equal to 20% of the offer amount. The payment is treated as a payment of tax and is nonrefundable. That is, it will not be returned even if the offer is deemed to be not processable, later returned or rejected. A lump sum cash offer means any offer of payments made in five or fewer installments.
- Taxpayers submitting requests for periodic payment offers must include the first proposed installment payment with their application. A periodic payment offer is any offer made in six or more installments. The taxpayer is required to pay additional installments while the offer is being evaluated by the IRS. All installment payments are nonrefundable, even if the Offer is deemed not processable, later returned or rejected.
- Under the new law, taxpayers that qualify as low-income, based on current criteria, and submit a Form 656-A, will not have to submit the application fee.
- If the IRS cannot make a determination on an OIC within two years, then the offer will be deemed accepted. If a liability included in the offer amount is disputed in any court proceeding, that time period is omitted from calculating the two-year period. Once a determination letter is issued by the Offer Investigator, the 24 month time frame will be considered stopped. The 24 months does not include the time in Appeals.
- Offers in compromise requests are submitted using Form 656, Offer in Compromise. The form provides detailed instructions for completing an offer and includes all of the necessary financial forms. When submitting Form 656, taxpayers must include an application fee of $150, depending on the type of offer, unless they qualify for the low-income exemption or are filing a doubt-as-to-liability offer.
AMOUNT OFFERED TO THE IRS FOR THE OIC
The Form 656 requires the explicit statement of the entire monetary offer. This offer, however, must exclude any payments that have already been made, anticipated refunds, levied funds, or foreseeable benefits from capital or net operating losses.
PAYMENT TERMS
- Taxpayers are expected to pay the entire amount offered in as short a time as possible. Acceptable offer terms should be determined by the IRS Agent and should not be limited to the proposal of the taxpayer. The IRS will often look to expand the financial terms of the Offer.
- The amounts and due dates of payments must be specified.
- There are three (3) types of payment terms that the Service and the taxpayer may agree to:
- Lump Sum Cash — Payable in five or fewer installments from notice of acceptance; must be accompanied by a payment of 20% of the offered amount.
- Short Term Periodic Payment — Payable in six or more installments within 2 years from the IRS received date. It must be accompanied with the first proposed installment, and additional installments must be paid in accordance with the taxpayer’s proposed offer terms while the Service evaluates the offer. If an amended offer is secured, the 24-month period begins the date the offer is accepted.
- Deferred Periodic Payment — Payable in six or more installments 25 or more months from the IRS received date, but within the time remaining on the statutory period for collection. It must be accompanied with the first proposed installment, and additional installments must be paid in accordance with the taxpayer’s proposed offer terms while the Service evaluates the offer.
- A taxpayer may designate payments of pre-acceptance to a specific liability including trust fund. Once the offer has been accepted, the funds are applied in the government’s best interest and the taxpayer no longer has the right to designate payments.
- If an Offer in Compromise is rejected you may file another Offer In Compromise.
STANDARD CONDITIONS
- Taxpayers are obligated to agree to all the standard conditions of the agreement, as detailed on Form 656.
- They should also be cognizant of compliance issues, which necessitate the timely filing of tax returns and payment of the tax due for the subsequent 5-year period.
INTEREST ON THE COMPROMISE AMOUNT
- For all offers accepted subsequent to December 31, 1999, interest on the compromised sum is also included in the compromise.
- For all offers accepted prior to January 1, 2000, interest will persist in accruing until the compromised amount has been completely paid.
ACCEPTANCE RATES OF THE OFFERS IN COMPROMISE
Around 25% of Offer in Compromise proposals are accepted by the Internal Revenue Service. In 2009, a total of 11,000 Offers were accepted by the agency.
TAX PROFESSIONAL RATES OF ACCEPTANCE
Although there is no statistical data available, I would estimate that roughly 75% of authentic professional tax resolution firms are accepted.
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