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If you are substantially behind on your personal taxes you may be considering a tax settlement. In some cases, an offer in compromise can offer you a quicker resolution and reduce the total amount paid to the IRS. However, before you submit an IRS offer in compromise, you and your tax attorney should have a frank conversation to determine what you can pay, and whether the IRS will say yes.
An Offer in Compromise (OIC) can be a useful tool to resolve outstanding tax liabilities, pay less than the total amount owed, and stop ongoing interest and penalties. It can also disqualify you from being certified for passport consequences due to having “Seriously Delinquent Tax Debt”. You may submit an OIC anytime after receiving your first notice of delinquent taxes until you appear at a Collections Due Process (CDP) hearing.
The taxpayer begins the OIC process by preparing an offer and completing the required forms. (You will need to have all your past tax returns filed before you begin.) Depending on your personal and financial circumstances, you and your tax attorney may decide to submit an OIC based on:
Your tax attorney will help you decide which basis is most likely to be accepted, the amount you should offer to pay, and the schedule for those payments. While your income to tax-debt ratio may make you doubt the collectibility of the account, the IRS generally has a more aggressive take on what taxpayers can pay. Collectibility cases are rejected if the IRS determines the taxpayer could pay the entire balance within the 10 year statute of limitations. For example, if you owe $100,000 for the last tax year and can pay $1,000 per month, the IRS will reject your OIC since there are more than 100 months before the end of the statute of limitations.
Once you decide the proper basis and payment terms, your attorney will then help you to prepare all the required forms and put together a statement and explanatory memorandum. These documents will give the IRS employees a complete picture of your financial situation, income, needs, and special circumstances. You should expect these documents to be quite substantial, including several exhibits providing proof of your financial circumstances. By working with your attorney to provide the necessary documentation along with your initial OIC, you can avoid follow-up requests for information, or even having your offer rejected.
Every Offer in Compromise must include payment of a user fee of $186 dollars. (This fee can be waived in low-income cases). If you are filing based on collectability or economic hardship, you will also need to make an initial payment based on the proposed terms in the OIC. There are two options for this:
As soon as the OIC and related fees and payments are served on the IRS, the Department must stop all collection efforts for as long as the offer is pending (often several months). Once the settlement officer receives the OIC, he or she submits it to the Centralized Offer in Compromise Unit (COIC Unit) for consideration. That unit reviews all the documentation and determines if it is a “processable” offer, meaning that all the necessary forms are completed and filed, and there is no current bankruptcy involving the taxpayer.
Next, the OIC must be substantiated, meaning that proof is provided for the financial claims made in the offer. This can happen one of 2 ways:
During the investigation process, if the IRS investigator assigned to the case believes the offer may be rejected, he or she may contact you or your tax attorney to negotiate an alternative resolution. This could include providing more documentation, or signing a Future Income Collateral Agreement. This may be used if you anticipate earning or coming into more money in the near future because, for example:
The Future Income Collateral Agreement will state that you agree to pay a percentage of that increased future income in addition to the amount owed in the OIC if that financial event occurs within the set time period.
Based on the documents presented, the conversations with your attorney, and any Future Income Collateral Agreement you reach, the offer specialist can recommend that the IRS:
He or she makes that decision based on:
When the IRS accepts your OIC (or amended OIC after negotiations are complete), that becomes a conclusive settlement of all your outstanding taxes, penalties, and interest for the period included in the offer, provided that you comply with the following conditions:
To make sure you meet those conditions, the IRS may file a notice of tax lien on your property until the conditions are satisfied. The Statute of Limitations for collections is also suspended until 1 year after the conditions are met. Once the last payment is made and the last tax return is filed, the IRS will release all liens and levies. However, if you miss a payment or invalidate the agreement, the IRS will move forward with enforcement and you will have to start the OIC process over again.
If negotiations fail, or the IRS does not believe there is doubt as to liability, it may send you a letter rejecting your OIC. That letter must state:
Once you receive this letter, you have a right to appeal the rejection within the IRS administrative process. Your attorney will guide you on how and when an appeal should be filed.
Under the Internal Revenue Manual, an Offer in Compromise can be returned, rather than rejected if there is an ongoing TERPA audit or ATAT investigation, among other reasons. When the OIC is returned, it means that the taxpayer may be able to submit it again in the future, but something stands in the way of acceptance now.
If you are considering an Offer in Compromise as a way to reach a tax settlement, you need to discuss your options with an experienced tax attorney first. He or she can help you weigh your options, prepare the necessary paperwork, and understand what could happen if the IRS says no or returns the OIC.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you are considering sending the IRS an Offer in Compromise, contact Joe Viola to schedule a consultation.