IRS Offer in Compromise
The offer in compromise is the process used to settle unpaid taxes for less. If successful, it results in an agreement between the taxpayer and the IRS that settles a
tax liability for payment of less than the full amount owed.
The IRS’s power to settle tax debts is set out in Section 7122. This broad power is summarized in the IRS’s policy manual as follows:
the Service will accept offer in compromises when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An offer in compromise is a legitimate alternative to declaring a case currently not collectible or a protracted installment agreement.
An offer in compromise covers all tax, penalties, and interest for the type of account for the tax periods covered by the offer.
The IRS and the taxpayer are prohibited from reopening a tax period covered by the offer in compromise. There are exceptions. For example, the tax period can be reopened if there was a falsification of information or documents, concealment of the ability to pay and/or assets, or a mutual mistake of material fact that is of enough significance to cause the agreement to be set aside or reformed.
Three Types of Settlement Offers
There are three different grounds for submitting an offer in compromise. They include (1) doubt as to collectability, (2) doubt as to liability, and (3) to promote effective tax administration, and yes, there are rules for each type of offer.
Doubt as to Collectibility
A doubt to collectability offer may work if there are genuine doubts exists that the IRS will be able to collect the full liability amount within the collection period. So, a taxpayer who is able to pay his or her tax debt in full or through an installment agreement is not eligible for an offer in compromise based on doubt as to collectible.
One has to consider the taxpayer’s reasonable collection potential to determine the offer amount. This includes analyzing the taxpayer’s assets and disposable income given IRS guidelines.
This can be challenging, as there are a number of rules and IRS policies that come into play. There are a number of situations where it is difficult to apply these rules. For example, taxpayers with variable income may find it difficult to apply these rules. Those who die owing the IRS back taxes can also raise difficult questions for the estate’s executor.
Note that taxpayers who have a current bankruptcy proceeding are generally not eligible until after the bankruptcy case is closed.
Doubt as to Liability
A doubt to liability offer may work when there is a genuine dispute to the existence or amount of the correct debt under law. Note that this type of offer cannot be accepted for a tax liability that has been finally settled by the courts.
Effective Tax Administration
An effective tax administration offer may work when there is no doubt that the assessed tax is correct and no doubt that the amount could be collected, but the taxpayer has economic hardship or other special circumstance
which would allow the IRS to accept an offer in compromise.
Note that this type of offer is only available for individuals, not businesses or other entities.
General Requirements for Offers
To be eligible for an offer in compromise, the taxpayer must file all tax returns that are legally required to be filed, have received a bill for at least one tax debt included in the offer, have made all required estimated tax payments for the current year, and have made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.
Payment Options & Amounts for Offers
Taxpayers can propose two different types of payment terms–lump sum and periodic payments. A lump sum cash offer is any offer of payment made in five or fewer installments within five months of acceptance of the offer. A periodic payment is any offer in six or more installments. The total installments cannot exceed 24 months.
The amount of the offer has to be at least equal to the taxpayer’s reasonable collection potential (RCP). The IRS relies on standardized guidelines to determine a taxpayer’s RCP in order to evaluate collection alternatives. National standards are used to determine a taxpayer’s food, clothing, health care, personal care, and miscellaneous expenses. Local standards are used to determine a taxpayer’s housing, utilities, and transportation expenses. See IRM 188.8.131.52 and 184.108.40.206. The taxpayer may be able to establish that the IRS should depart from these standards–and the IRS will often do this if the facts and circumstances warrant it.
The IRS will usually not accept a compromise that is less than the RCP, absent a showing of special circumstances. Johnson v. Commissioner, 136 T.C. 475, 486 (2011), aff’d, 502 Fed. Appx. 1 (D.C. Cir. 2013). The IRS often rejects offers-in-compromise because the taxpayer’s ability to pay is greater than the amount he proposes to pay under the compromise proposal. When the IRS determines that a taxpayer has dissipated assets in disregard of the taxpayer’s outstanding tax liability, the dissipated assets may be included in the minimum amount that is to be paid under an acceptable offer-in-compromise.
Submitting the Offer
The taxpayer has to initiate the offer in compromise process. At a minimum, this includes submitting the IRS’s offer in compromise form, a collection information form, and the application fee.
An oral agreement with the IRS to settle a debt generally does not count as an offer in compromise.
Note also that a taxpayer does have to provide financial information for all household members, even if they are not part of the offer and they do not owe any taxes.
While the Offer is Pending
During the period that an offer in compromise is being reviewed by the IRS, the statute of limitations for assessment and collection is suspended. The IRS will keep any refunds due to the taxpayer for any tax period while the offer is pending.
It is usually best to file the offer before the IRS imposes an ongoing levy, as submitting an offer does not obligate the IRS to lift a pre-existing levy. It does however prevent the IRS from instituting new levies (absent a jeopardy situation).
The IRS will also not remove pre-existing lien notices and it may also still file liens after the offer is submitted.
The IRS only has two years to either accept, reject or return an offer in compromise. If it fails to act, the offer will be deemed accepted by the IRS.
It is important to continue to stay current on the most recent tax year filings and payments while the offer is pending. The courts have confirmed that the IRS can reject an offer if the taxpayer has not filed all required tax returns or is otherwise not in compliance with the tax laws. Balsamo v. Commissioner, T.C. Memo. 2012-109; Huntress v. Commissioner, T.C. Memo. 2009-161; Treas. Reg. §§ 6320 1(d)(2) Q&A-D8, 6330-1(d)(2) Q&A-D8. The failure to be current on payment of estimated taxes is a reasonable basis for rejecting an offer. Christopher Cross, Inc. v. United States, 461 F.3d 610 (5th Cir. 2006).
How the IRS Evaluates Offers
In evaluating offers submitted based on doubt as to collectibility, the IRS scrutinizes the taxpayer’s income and assets. These two items give the IRS an idea of its “reasonable collection potential.”
The taxpayer is required to submit financial information for consideration. The IRS can reject an offer if the taxpayer failed to submit the requested financial information. Tucker v. Commissioner, T.C. Memo. 2014-103; Huntress v. Commissioner, T.C. Memo. 2009 161. The IRS can even reject an offer if the taxpayer fails to provide information pertaining to the taxpayer’s nonliable spouse if they live in a community property state. Ranuio v. Commissioner, T.C. Memo. 2010-178.
This information is used to determine whether the IRS will entertain an offer-in-compromise and for what amount or other remedies. As noted above, an offer in compromise based on doubt as to collectibility will not be deemed to be realistic if the amount offered is less than the taxpayer’s reasonable collection potential. If the taxpayer makes an unrealistic offer, the offer will be rejected by the IRS.
Statistics indicate that most offers in compromise are rejected because they are not valid. The court cases bear this out too.
This may be due to unsubstantiated or false statements as to income or expenses, or so-called “dissipated assets” sold or disposed of before the offer is submitted.
Offers Submitted by Tax Resolution Firms
There are a number of “tax resolution” companies that promise to use the offer in compromise to settle tax debts for “pennies on the dollar” without first inquiring about the taxpayers particular circumstances.
While some tax debts very well can be settled for “pennies on the dollar,” most can not. If that were the case no one would be willing to pay their taxes.
Taxpayers should be wary of any “tax resolution” companies, especially if they tell the taxpayer that they can settle a tax debt for “pennies on the dollar” without having thoroughly examined the taxpayers particular situation.
It should also be noted that, depending on the circumstances, there may be other avenues available for settling a tax liability for less than what is actually owed. For example, the IRS auditor, IRS collector, the IRS appeals officer, or the IRS attorney may be willing to settle or concede certain tax liabilities so that they can simply close the matter or they may deem the hazards of litigation too high given the amount of tax owed.
In other cases, the taxpayer may not owe the government anything or the government will not able to collect the outstanding tax liabilities anyway.
These avenues should be explored before submitting an offer in compromise.
We Can Help With Your Tax Debt
An experienced tax attorney can help ensure that the IRS and states follow these rules and that the rules are used to your benefit rather than your detriment.
If your case is in collections you need to speak to an experienced tax attorney.
Please call us at (713) 909-4906 or schedule an appointment to discuss your tax debt.
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