The IRS offer in compromise (“OIC”) program is a tax resolution option offered by the IRS to help taxpayers who are unable to pay their full tax liability. It allows eligible taxpayers to settle their tax debts for less than the full amount owed, based on their financial situation and ability to pay. The OIC program has helped many taxpayers resolve their tax disputes with the IRS and avoid further collection action, such as wage garnishments and bank levies.
In recent years, Congress has proposed changes to the OIC program as part of broader tax reform efforts. Some of these changes include increasing the minimum offer amount, limiting the eligibility criteria, and increasing the fees associated with the program. The Safe Accountable, Flexible, and Efficient Transportation Act (“SAFE Act”) is yet another reform effort.
About the Offer in Compromise
The IRS OIC program is authorized by Section 7122. An OIC is an agreement between the taxpayer and the IRS that settles the taxpayer’s tax debt for less than the full amount owed. To be eligible for an OIC, the taxpayer must demonstrate that they are unable to pay the full amount of their tax liability, or that paying the full amount would create economic hardship.
The IRS considers a variety of factors, including the taxpayer’s income, expenses, assets, and liabilities, when evaluating an OIC. The IRS refers to this as the reasonable collection potential.
The OIC is not a gift with no strings attached. If the IRS accepts the taxpayer’s OIC, the taxpayer must comply with all tax laws for the next five years or risk having the OIC voided. This puts a high onus on those who have compliance problems to stay compliant.
The SAFE Act & OICs
Both the House and Senate have now passed versions of the SAFE Act. This Act will be sent to a conference committee soon.
If passed the Act will make these changes for OICs:
- Current tax year compliance: Under the SAFE Act, taxpayers who submit an OIC must be in compliance with all federal tax filing and payment requirements for the current tax year. This means that taxpayers must have filed all required tax returns and paid all taxes due for the current tax year before submitting an OIC.
- Increased application fee: The SAFE Act increased the application fee for submitting an OIC from $150 to $186 as of 2021. This fee is non-refundable and must be paid at the time of submitting the OIC application.
- Retention of payments: The SAFE Act allows the IRS to retain any payments made by taxpayers while their OIC is under consideration. These payments can be applied to the taxpayer’s tax liability if the OIC is not accepted.
- Expedited processing: The SAFE Act requires the IRS to develop guidelines for the expedited processing of OICs in cases of economic hardship or where the collection of the full tax liability would cause undue economic hardship.
- Review of low-income taxpayers: The SAFE Act requires the IRS to review its policies and procedures for OICs for low-income taxpayers and make appropriate changes to ensure that these taxpayers are not unfairly burdened by the OIC process.
Overall, the provisions of the SAFE Act were intended to make the OIC program more efficient, while also ensuring that eligible taxpayers are in compliance with their current tax obligations
Mixed Reviews for the OIC Changes
The proposed law to modify the IRS OIC program has elicited mixed reactions from taxpayers and tax professionals alike. While the law seeks to improve the OIC program, concerns have been raised about its potential impact on taxpayers who are struggling financially and the U.S. government’s revenue.
If enacted, the law would increase the upfront payment required to submit an OIC, which may discourage eligible taxpayers from submitting an offer. Taxpayers who are unable to make the upfront payment will have to continue making installment payments until the IRS accepts or rejects their offer, which could be a serious problem for those who need the OIC to come into compliance. Additionally, the longer processing time for OICs and the increased rejection rate may further discourage taxpayers from submitting offers.
Moreover, the OIC program is a voluntary program, and many taxpayers who have not been pursued by the IRS use it to resolve their tax disputes. However, with the proposed law’s increase in upfront payments, some taxpayers may choose to discharge their tax liabilities in bankruptcy, leaving the U.S. government with nothing.
It should also be noted that an accepted OIC encourages future compliance and generates tax revenues for the U.S. government. Once the OIC is accepted, the taxpayer has to remain compliant with the tax laws for five years, or the OIC would be voided. With fewer taxpayers filing OICs, there may be fewer taxpayers subject to the compulsion to remain compliant, leading to a decrease in future compliance and revenue for the government.