Offer in Compromise
Offer in Compromise
By Michael Rude, EA
September 13, 2015
Michael Rude, EA and TaxRepServices.com, 2015. Unauthorized use and/or duplication of any material on this website without express and written permission from this site’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Michael Rude, EA and TaxRepServices.com with appropriate and specific direction to the original content.
The following information is current as of September 13, 2015.
An offer in compromise (OIC) is an agreement between the taxpayer and the government that settles a tax liability for payment of less than the full amount owed. There are specific requirements that must be met in order for the government to accept an OIC.
The Secretary of the Treasury is granted authority to compromise tax liabilities in IRC Section § 7122. The Commissioner of Internal Revenue, under Treasury Regulation § 301.7122-1, is authorized to compromise a liability on any one of three grounds: Doubt as to Collectibility (DATC), Doubt as to Liability (DATL), or to promote Effective Tax Administration (ETA).
The Internal Revenue Service (IRS) 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 according to IRS standards and procedures. Taxpayers are required to provide documentation to verify their ability to pay. The ultimate goal is a compromise that is in the best interest of both the taxpayer and the government. An OIC in essence creates a fresh start for the taxpayer. In order for an OIC to be considered and accepted, the taxpayer must show they are in compliance with current payment requirements if estimated taxes are required, or that they have proper withholding in order to prevent the accrual of future liabilities. The taxpayer must remain in compliance with filing and paying for five years after their OIC is accepted.
In order to submit an OIC, the following forms must be submitted: Form 656, Offer in Compromise; form 433-A (OIC), Collection Information Statement for Wage Earner and Self-Employed Individuals and if applicable; for 433-B (OIC), Collection Information statement for Businesses. Documentation supporting the information entered on forms 433-A (OIC) and 433-B (OIC) must accompany the OIC package that would include the 656, 433-A (OIC), ((433-B (OIC) if applicable)) and required payments. Unless a taxpayer meets Low Income Certification Guidelines, payment of the $186 OIC application fee and a 20% of the total amount offered must be included with the OIC.
There are two types of payment terms offered on the Form 656 that the IRS and the taxpayer may agree to:
Lump Sum Offer — a lump sum cash offer (one payable in five or fewer installments within five months of offer acceptance) must be accompanied by the payment of 20% of the amount of the offer.
Periodic Payment Offer A periodic payment offer (one payable in six or more installments) must be accompanied by the payment of the amount of the first proposed installment and additional installments must be paid while the offer is being evaluated by the Internal Revenue Service. The total installments may not exceed 24 months.
OICs are worked by Offer Examiners (OE) in one of the Centralized Offer in Compromise (COIC) locations or worked by an Offer Specialist (OS) in a field office. Offer Specialists are revenue officers who have received specialized training in Offers in Compromise. There are numerous factors that determine whether an OIC is to be worked in the COIC location or assigned to an Offer Specialist for a field investigation. OIC cases that involve complex issues will be assigned to Offer Specilaists.
Determining the appropriate amount to be offered can be far more complex than the calculation completed on form 433-A (OIC) and 433-B (OIC). The forms utilize a multiplying factor of 12 (form Lump Sum Offer) and 24 (for Periodic Payment Offer) to arrive at “Future Remaining Income”. However, this amount is not the amount the OE or OS uses in their calculation of future remaining income for what would constitute an appropriate offer. In addition, it is rare that the OE or OS will arrive at the same calculation of the Net Realizable Equity (NRE) in assets that is entered on the 433-A (OIC) or 433-B (OIC). The final determination of the agreed upon NRE in assets figure is frequently a result of the negotiation between the taxpayer or their representative and the assigned OE or OS.
The Internal Revenue Manual (IRM) contains hundreds of pages of procedures and instruction for IRS employees who are assigned OIC cases. The above article in not intended to provide specific guidelines or procedures to enable the reader to prepare and submit an OIC. If you have tax liabilities in excess of what you can pay in full now or in the near future, then I highly recommend you contact an experienced tax professional: Enrolled Agent (EA), CPA or tax attorney who has proven success in working OIC cases.