The IRS Offer in Compromise: What You Should Know
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.
Submitting an Offer in Compromise
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.
Preparing the Offer
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:
- Doubt as to liability (where the existence or amount of tax debt is in dispute)
- Doubt as to collectibility (where your assets and income are less than the full amount of tax liability)
- Effective tax administration (where full repayment would create economic hardship or exceptional circumstances may doing so unfair or inequitable)
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.
Paying the Fees and Downpayment
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:
- Lump Sum Cash Offer: You propose to pay the entire balance of your offer in 5 or fewer installments over 5 months after the offer is accepted. Under this payment option, you must submit 20% of the lump sum amount, along with the user fee.
- Periodic Payment Offer: You propose to pay the entire balance of your offer in 6-24 monthly installments. Under this payment option, you will make your first proposed installment payment along with the OIC and user fee.
The IRS Process to Review OICs
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:
- Streamline Offer Process: An investigator will review non-complex OICs and request additional documents or clarification through phone calls with you or your tax attorney before making a recommendation. This option is generally faster, but is only available to certain taxpayers.
- Collections Due Process Hearing: You and your attorney present the documentation and proof at a hearing with an IRS official who can refer the case for a more thorough investigation or verification if questions remain after the hearing.
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:
- You are a student anticipating graduation and obtaining professional employment
- Your parents are aging and likely to leave you a substantial inheritance
- You are attempting to sell a house or other large asset
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:
- Accept the offer
- Reject the offer
- Return the offer
He or she makes that decision based on:
- Whether the legal and administrative procedures and requirements are met
- Relevant issues raised by the taxpayer
- The balance between efficient collection of taxes and intrusion into the taxpayer’s affairs
Acceptance of the Offer in Compromise
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:
- Pay all installments by the date specified in the acceptance letter
- Continue to pay all prior installment payment agreements
- Waive the right to contest liability for the taxes included in the offer
- Agree that the IRS can keep all refunds due up to and including the year the OIC is accepted
- File all tax returns and pay all outstanding taxes for the next 5 years
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.
Rejection of the Offer in Compromise
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:
- The basis for the proposed compromise
- The amount the IRS could reasonably collect
- The amount the taxpayer offered to pay
- A description of the attempts to negotiate alternative resolution terms
- Outstanding issues of disagreement
- Any special circumstances related to the case
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.
Return of the Offer in Compromise
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.