The Tax Times: The REAL Truth About Offers in Compromise

Friday, August 9, 2019

The REAL Truth About Offers in Compromise

My colleague Steve Klitzner posted in his newsletter The Truth About Offers In Compromise where he discusses the realities regarding Offers In Compromise. He goes on to state "In the real world, people and businesses settle for less all the time. So when they come to Steve with a tax problem, they want to know if they can make a deal with the IRS. Who would turn down $90,000 to resolve a $100,000 debt? The IRS, that’s who."

On April 15, 2019 we posted Know Your Choices to Pay Your Tax Bill! - Part 2, where we discussed that an Offer in compromise (OIC) is an agreement between a taxpayer and IRS that settles the taxpayer's tax liabilities for less than the full amount owed. Taxpayers who can fully pay the liabilities through an installment agreement or other means, won't qualify for an OIC in most cases. IRS says that to qualify for an OIC, the taxpayer must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.
IRS may compromise a tax liability on any of the following grounds:

Doubt as to liability. There must be a genuine dispute as to the existence of amount of the correct tax debt.
Doubt as to collectibility. Such doubt exists in any case where the taxpayer's assets and income are less than the full amount of the tax liability.
To promote effective tax administration. An offer may be accepted on this ground if: (a) collection in full of the tax owed could be achieved, but (b) requiring payment in full would either create an economic hardship, or would be unfair and inequitable because of exceptional circumstances. (Reg. § 301.7122-1(b))

To request an OIC, the taxpayer must apply using Form 656, Offer in Compromise. The taxpayer also must submit Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433-B (OIC), Collection Information Statement for Businesses.

A taxpayer submitting an OIC based on doubt as to liability must file a Form 656-L, Offer in Compromise (Doubt as to Liability), instead of Form 656 and Form 433-A (OIC) and/or Form 433-B (OIC).

The OIC application generally must be accompanied by a $186 application fee. However, the fee is waived for certain low income taxpayers or if the OIC is based on doubt as to liability. (Form 656-B, Notice 2006-68, 2006-31 IRB 105, Sec. 4.03)

Except with regard to offers filed by low-income taxpayers, or based only on doubt as to liability, an OIC must be accompanied by a nonrefundable payment that depends on how the taxpayer is offering to pay.

A taxpayer may propose to pay in a lump sum, i.e., an offer payable in five or fewer installments within five or fewer months after the offer is accepted. If such an offer is made, the taxpayer must include with the Form 656 a payment equal to 20% of the offer amount. This payment is required in addition to the $186 application fee.

A taxpayer may propose to make periodic payments, i.e., six or more monthly installments made within 24 months after the offer is accepted. When submitting a periodic payment offer, the taxpayer must include the first proposed installment payment along with the Form 656. This payment also is required in addition to the $186 application fee. (Code Sec. 7122(c)(1)).

Some people are just not eligible. They own too much or earn too much. For others, we can get an agreement where they pay as little as $100 to settle the entire debt.

The IRS reported acceptance rate is 42%, but our success rate is better than that, because we only submit Offers for those who truly qualify for the program.