Some U.S. taxpayers may have a tax liability they are simply unable to pay, a tax debt for which there is doubt as to liability, or a tax debt for which payment would cause a severe economic hardship. When this happens, the Internal Revenue Service (IRS) can choose to accept what is known as an “offer in compromise.” An offer in compromise (OIC) is accepted when the IRS deems it unlikely that the taxes owed can be fully collected, and that the offered amount fairly approximates what reasonably could be collected.
The goal is to collect as much as possible, as quickly as possible, and with as little cost as possible to the government. In addition to benefiting the government, offers in compromise can give taxpayers a “fresh start” that will encourage voluntary compliance with tax filing and payment obligations in the future.
Offers in compromise may have one of four bases:
- Doubt as to liability for the tax debt if there is a genuine dispute as to the existence or correct amount of the tax debt;
- Doubt as to collectability of the tax debt, where the amount the government calculates it could reasonably collect is less than the amount owed;
- Doubt as to collectability, with special circumstances (essentially, special circumstances exist that warrant acceptance of an offer for less than the calculated reasonable collection potential) ; or
- To promote effective tax administration where the taxpayer could pay the full amount of the tax liability, but to do so would work a severe economic hardship.
Determining Eligibility for an Offer in Compromise
Offers in compromise may benefit taxpayers by ending IRS debt collection actions against them, preventing garnishment of income, and of course, reducing their total tax debt. Of course, the IRS benefits as well; although the agency will not collect the total tax owed, an offer in compromise allows the IRS to maximize its collections while minimizing the resources devoted to pursuing payment. If you think an offer in compromise could be right for your needs, you should speak with an experienced tax attorney who can take your unique circumstances into account and explore all your possible payment options with you.
If you and your attorney determine that pursuing an offer in compromise is the best course of action for you, you need to make sure that you are eligible for this option. If you are in an open bankruptcy proceeding, you will not be able to make an offer in compromise. Likewise, if you have not filed all federal tax returns required of you and made all required estimated tax payments for the current year, you cannot pursue this avenue for relief. Taxpayers who are self-employed and have employees must also have submitted all required federal tax deposits for the current quarter.
These are threshold requirements; in other words, you must meet these requirements in order to even be eligible to apply to make an offer in compromise, but meeting these requirements does not guarantee that any offer you make will be accepted. Acceptance of an offer in compromise is at the discretion of the IRS, so the agency must believe that to do so would be in its best interests–that is, that it could not collect more of the tax debt in any other way.
Calculating and Submitting an Offer in Compromise to the IRS
If you meet the threshold eligibility requirements, the next step is to prepare and submit an offer. There is a non-refundable filing fee of $186 which must be submitted, along with an initial payment to be applied to the tax debt. This initial payment is also non-refundable. However, you may not need to make these payments if you meet the IRS’ Low Income Certification.
In addition to these payments, of course, certain forms must be submitted:
- Form 656, Offer in Compromise
- Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals), or Form 433-B (Collection Information Statement for Businesses), along with any documentation required to support the information on the forms.
An offer in compromise is calculated using a determination of the taxpayer’s equity in assets and his or her future earning potential. The amount offered in compromise should exceed the collection potential of the equity in all assets plus the surplus in monthly income identified on Form 433.
What Else You Should Know About Offers in Compromise
You should not submit an offer until you have received a IRS collection notice for any debt you wish to include in your offer. While your offer is being evaluated, you must file all required tax returns, estimated tax payments and other required federal tax payments until a final decision on your offer has been rendered. During the evaluation period, penalties and interest will continue to accrue. If your offer in compromise is accepted, you must continue to timely file all required returns and make all required payments through the fifth year after the acceptance, or longer, if you’ve received extensions.
Up until the time that the IRS formally acknowledges that your offer in compromise is pending, the IRS may levy your assets and keep any proceeds received from the levy. If you have an installment payment agreement with the IRS, you may suspend your installment payments while your offer is being considered. If your offer is rejected, and you have not incurred additional tax debt in the meantime, the IRS will reinstate your installment agreement without any additional fee.
While an offer in compromise can provide much-needed tax relief, it should not be undertaken without thorough consultation with an experienced tax professional. We invite you to contact the tax controversy attorneys of Ortiz & Gosalia without delay. Our attorneys have post-JD degrees in tax law and offer a range of counsel and representation with regard to U.S. tax law. We can explore your options with you and help you choose the tax debt resolution option that is best for your needs.