For some taxpayers it is legitimately impossible to pay the full tax liability owed to the IRS or, if they did so, paying the full liability would create extreme financial hardship. The IRS allows these taxpayers to settle tax debt for less than the full amount owed, but only if an installment agreement or other method would not work. An Offer in Compromise is an agreement between a taxpayer and the Internal Revenue Service that settles the tax liability for less.
In order to be able to apply for an Offer in Compromise, the taxpayer must meet a certain set of requirements. The taxpayer must be current with filing all of their Individual Income Tax Forms (Form 1040), as well as any payments owed to the federal government. Taxpayers who are in an open bankruptcy proceeding unfortunately are not eligible to apply.
You can find step-by-step instructions and submit an Offer in Compromise through the IRS form, Form 656-B. The booklet explains the documents that are needed such as;
- Form 433-A (OIC) for individuals or 433-B (OIC) for businesses and any required documentation that is required on the forms.
- Form 656 (S): Individual and business tax debt must be submitted on a separate Form 656.
- $150 application fee that is non-refundable
- An initial payment that is non-refundable for each Form 656
The IRS offers two options for the initial payment. The lump sum payment is an initial payment of 20% of the total offer of the application. Once the application is accepted, the taxpayer pays off the remaining balance on the offer in five or fewer payments within 24 months after the offer is accepted. The Periodic payment has an initial payment, and then the taxpayer continues to pay the remaining balance monthly and makes six or more monthly installments within 24 months to pay off the debt. If the IRS accepts the offer, you continue your monthly payments until the amount is paid off in full.
There are three grounds that the IRS may accept an Offer in Compromise for; doubt as to collectability, doubt as to liability, and exceptional circumstances. Doubt as to collectability means that there is a reasonable doubt existing that the taxpayer will never be able to pay the full amount of the liability owned within the collection period. Doubt as to liability is when a legitimate doubt exists that the assessed tax liability is correct. This can happen if a tax examiner made a mistake or the taxpayer has new evidence to offer. The third ground that the IRS may accept an Offer in Compromise is when, even though there is no doubt that the tax amount owed is correct and there is potential to collect on the full amount of taxes owed, but there is an exceptional circumstance. In this situation, the taxpayer must demonstrative that the collection of the tax would create an economic hardship that is unjust and inequitable.
The IRS generally accepts an Offer in Compromise when the evidence submitted shows that the government will be unlikely to collect the liability in full, and the amount in the offer equals the amount that the IRS believes they can collect from taxpayer equity and disposable monthly income. The IRS is not bound to the amount offer or the terms that are proposed by the taxpayer when they make an offer to settle taxes. IRS Investigators may negotiate a different offer amount in different terms. This is where an experienced Tax Attorney who understands how the IRS works is an asset to taxpayers. This is a complex negotiation, because the IRS knows the Tax Code and often taxpayers are often inexperienced. Working with a New York State Tax Attorney allows the taxpayer to have someone help them who is experienced and understanding of the Offer in Compromise Program.
If your offer is accepted, you must meet requirements, and continue making payments. The taxpayer must file all required tax returns, any refunds due within the calendar year are applied to the tax debt, Federal tax liens stay in place until the offer terms are paid off, and the taxpayer should understand that some information is available for review by the public. The IRS also expects that the taxpayer will no longer be delinquent and will comply with all tax laws. If the taxpayer does not follow the terms of the Offer in Compromise, the IRS can determine that the Offer in Compromise is in default. When in default, the offer is no longer in effect and the IRS can then collect the amount originally owed, as well as interest and penalties.
If an offer is rejected by the IRS, the taxpayer is notified by mail. The letter will explain why the IRS rejected the offer, and you may appeal the rejection within 30 days using a Request for Appeal of Offer. Having an experienced Tax Attorney can help you understand the process of the Offer in Compromises program and help resolve your tax liabilities.