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  • Robert Nath

Offers In Compromise

Updated: Mar 14, 2022

What is an “offer in compromise?”

An offer in compromise (shorthand – “offer”) is an offer you make to the IRS to settle a tax debt for less than the full amount owed. The IRS can accept, reject, or counter-offer.

How does the offer process generally work?

You file Form 656 (or 656-OIC) for your personal or business tax debts. You also send in a collection information statement (Form 433-A, 433-B). The IRS receives it, inspects it to see if it’s complete and “processible,” and if so, assigns it to an Offer Examiner or Offer Specialist. “Processible” means you have filled out the paperwork with enough detail (not every blank needs to be completed), signed and date it, sent in the filing fee and initial payment (if required), and you are in “current compliance.” That term means you have filed all required tax returns for yourself and/or your business, and paid all taxes due for the current period. Example: for 2020, you have paid in enough withholding or estimated income tax.

If the examiner recommends acceptance, he/she provides detailed computations to you for your approval. This is also done if the examiner counteroffers. The recommendation goes through at least two levels of review before official approval. If IRS rejects the offer, you have a right of appeal to the Independent Office of Appeals.

Why does the IRS ask for so much information when I file an offer in compromise?

The IRS asks for a complete accounting of all of your assets, liabilities and income because it wants to know you can’t pay more than you are offering (It calls this “reasonable collection potential”.) It will also ask for historical information, such as any transfers of property you have made after the taxes accrued or in the past 10 years. Like any creditor, the IRS wants the most it can get, especially if it is going to take less than the full amount due. In fact, many offers are for a fraction of the overall taxes due. That’s a big hit, so the IRS wants assurance that there is no more you can pay. And, it is entitled to that assurance. So it’s usually in your best interest to provide full cooperation.

Can I offer to pay the tax only, or tax and some interest, and the IRS will forgive penalties?

No. The IRS looks on all of your liabilities – tax, penalty, interest – as being of equal stature. A dollar of penalty or interest is the same as a dollar of tax. It is money owed. So it will require that you list all of your liabilities in the offer, and it will discuss with you how much of the total of everything it believes you can pay.

Note that if you believe you have “reasonable cause” for penalty relief, that is a separate issue and discussion. If you file an offer (based on inability to pay), the only issue is whether you can pay in full, or whether the IRS agrees to take less.

You can also file an offer based on “doubt as to liability,” Form 656-L, a way of contesting those penalties.

Will the IRS “use” the information I have provided in an offer to turn around and seize assets?

No, at least not on purpose. The IRS uses that information to see how much you can pay. To use the offer process as a subterfuge for enforced collection would be a violation of law. Still, if your offer does not work out and the Collection Division gets back into the picture, all of that information is in fact available to the revenue officer. You therefore take a chance, but if you had not filed that offer, the Collection Division would be asking for the same collection information anyway.

I’ve heard you can offer “pennies on the dollar” for an offer in compromise. Is this true?

No. The IRS evaluates every offer in detail. The agency reviews all assets and liabilities to determine your “reasonable collection potential.” You can’t just throw a few dollars at them and expect an acceptance. That may happen, but only if the numbers justify such a result.

How can I know if I am eligible for an “offer in compromise?”

Check the IRS website, It has a full guide on offers in compromise, including “fill-in” forms that the IRS requires if you filed such an offer, and formulas for determining how much to offer. (Note: the IRS does not record this information for later use. Only when you file the offer will it officially “take notice” of your application.)

What types of offers in compromise are available?

There are three:

1. Offer based on “doubt as to collectibility.” You agree you owe all of the tax, penalties, and interest the IRS has assessed, but you contend you cannot pay the full amount within the statute of limitations remaining when you submit the offer. This type of offer is by far the most used.

In this type of offer, there are two baskets of assets the IRS examines: (1) fixed assets such as real estate, bank accounts, insurance policies, retirement plans, and (2) “future income potential.” That means your income minus your IRS-allowed living expenses. That net number, per month, is a stream of income which in theory has value over time. The offer process assigns a value to that stream of income, as well as to the fixed assets.

2. Doubt as to liability. You disagree with the amount the IRS has assessed, and offer to pay a lesser amount based on your claim that you owe less.

3. Effective Tax Administration. You agree you owe the amounts due, and analysis shows it can be fully paid, but your special circumstances merit a reduction. These circumstances mainly include the argument that if you paid in full, you would be left without the means to support yourself. Thus, offers of this type are often based on advanced age, illness, lack of income, inability to borrow against assets.

Can I pay the offer amount over time?

Yes. This question applies to collectibility and effective tax administration offers. The IRS has three types of “payment plans:”

(1) cash offer (20% down and 80% paid within 90 days of acceptance); (2) short-term offer (paid within 24 months of acceptance); and

(3) “life of the statute” offer (paid over the remainder of the period of limitations).

My business owes substantial payroll taxes, penalties and interest. Will the IRS compromise those taxes?

Yes, if the facts show the business can’t pay the full amount. However, the IRS will look at all business assets, as well as secondary collection sources such as the officers’ personal assets, before determining what the “right” compromise number may be. Such an offer takes careful planning and advocacy. The IRS will evaluate what the business can pay, then what the officers can pay, to determine the “reasonable collection potential.” If that amount is less than what the business owes, and it can be paid, you have yourself an offer in compromise.

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