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Offer In Compromise (OIC) 1. GENERAL - An offer is in the format of a contract and is submitted on Form 656. IRS has authority under IRC 7122 to compromise tax liabilities. There is no statutory authority requiring IRS to accept offers. The process for getting an OIC accepted by IRS is one of "good faith" negotiation by all parties, financial statement substantiation, understanding taxpayer rights, knowing IRS practices and procedures, and using the appeal function when appropriate. The acceptance of an offer is the discretionary right of the Service. IRS may reject an otherwise acceptable offer as "not being in the best interest of the public". All rejected offers have appeal rights. There is a 30-day period in which to file an appeal when an offer is rejected. IRS generally withholds collection action while they consider the offer. IRS has liberalized its OIC process. Policy statement P-5-100 requires Service employees to "take a positive and pro-active approach towards offers" and - "An offer will be accepted when the tax liability cannot be collected in full and the amount offered reasonably reflects collection potential". IRS further states that the offer-in-compromise is available "to provide delinquent taxpayers with a fresh start toward future compliance with the tax laws." On 3/29/99, the Commissioner stated "we want to work with taxpayers to make it simpler for them to apply for an Offer-in-Compromise. The process will be streamlined to make more and more people eligible." IRS has indeed streamlined the process and is taking a pro-active approach towards offers. 2. THREE BASES FOR OICS - Doubt as to Liability, Collectibility or Effective Tax Administration: Doubt as to Liability means "I don't owe it." This type of offer is an infrequent submission. These offers do not require a financial statement. They do require convincing legal arguments to substantiate why the tax is not owed. Doubt as to Collectibility means "I can't pay it." This is the most common offer-in-compromise. This type of offer requires full financial disclosure of assets, income and expenses. Effective Tax Administration (formerly Equitable Relief) is a new provision mandated by congress. This type of offer also requires full financial disclosure of assets, income and expenses. Taxpayers may be eligible for a compromise if: 1.Collection of the entire tax liability would create an economic hardship, or 2. Exceptional circumstances exist, such that collection of the full tax would be detrimental to voluntary compliance. Few taxpayers are qualifying for equitable relief. To qualify, taxpayers must first have a history of filing and paying their taxes. An IRS News Release outlines examples of economic hardship or exceptional circumstances, as follows: "Economic hardship can include taxpayers and their dependents facing a long-term illness, medical condition or disability where the person's financial resources will be exhausted while providing for care and support. An example can include a parent who has assets large enough to pay the tax bill, but those assets will be needed for care of a child with a long-term illness... can also cover cases where the sale or liquidation of assets to pay the tax bill would prevent the taxpayer from meeting basic living expenses. An example could be a retiree with a retirement fund large enough to pay the tax bill, but using the funds would deprive the person of basic living expenses." "Exceptional circumstances may be... extraordinary events beyond a taxpayer's control. An example might include someone who was hospitalized for several years, could not manage any financial affairs and was unable to file tax returns." 3. AMOUNT TO OFFER - You may have seen ads that say IRS will settle tax liabilities for "ten cents on the dollar." The ads are false and misleading. The percentage of the tax to be paid or the total amount of the tax is not a significant factor in determining an acceptable offer. The "base" amount that must be offered includes both: 1. Net equity in assets and, 2. A sum representing the taxpayer's ability to make monthly payments over a period of time - see terms in item 4. Net realizable equity - The amount offered must meet or exceed the total value of equity in assets. (Note, normally no offer can be made if the taxpayer's net realizable equity exceeds the tax liability.) IRS allows the starting point for asset valuation to begin at the "quick sale value." IR-1999-30 states that "the fair market value of assets will be reduced by 20 percent up front" and "the new guidelines allow IRS employees more freedom to assess an individual's particular financial hardship beyond the standard cost-of-living formulas." Taxpayer's ability to make payments - The amount offered must also give consideration to what the taxpayer is able to pay out of present and future income. Financial statements are required. Form 433A for individuals plus Form 433B if self-employed. Form 433B is required for a corporation or other business taxpayer. Substantiation of financial information will be required during the investigation. IRS will check public records for additional verification. 4. PAYMENT TERMS - Offers can be paid in three ways: a. Cash - paid in 90 days or less; includes net realizable equity in assets plus an amount determined by IRS as the taxpayer's monthly payment times 48 months (*or less if the statutes will expire earlier); or b. Short-Term Deferred Payment - payment in more than 90 days and up to 24 months; includes net realizable equity in assets plus an amount determined as the taxpayer's monthly payment times 60 months *; or c. Deferred Payment (DPOIC)- Taxpayers who cannot pay their tax debts by an installment agreement over the life of the collection statutes can qualify for a DPOIC with payment terms over the remaining statutory period for collecting the tax. There are 3 payment options for deferred payment (see page 5 of OIC Form 656). All options include the payment of net equity in assets plus an amount determined by IRS as the taxpayer's ability to make monthly payments. The difference in each option is when the net equity is paid. In option one, the total equity is paid up front. In option two, the equity is partially paid up front. In option three, nothing is paid up front and the net equity amount is blended as an addition to the pre-determined monthly payment amount to be paid out over the remaining life of the collection statutes. 5. SUBSTANTIATION AND VERIFICATION OF FINANCIAL INFORMATION We find that the submission of the following documents with the OIC facilitates the prompt processing and consideration of the offer - copies of: Filed Tax Return - last year's income tax Form1040 for individuals - Form 1120 for corporations Bank statements - for last 3 months on all bank accounts Pay Stubs - for past 3 pay periods, or most recent one if YTD Titles or Registration - to all vehicles Mortgage Statements - showing current balance(s) and monthly payment for house and vehicles Profit and Loss Statement - for the self-employed and business owners Proof of Payment - of current 1040ES and/or FTD payments for self-employed and business owners
6. TIME
FRAMES - IRS may take from 6 to 18 months to work an OIC Investigation and Field Work - The time it takes depends upon the workload in the IRS district, "local management's" attitude about OICs, competence of the Revenue Officer assigned the case, and other factors too numerous to mention. 7. COMPLIANCE - The OIC contract requires a pledge from the taxpayer that there will be at least five full years of total compliance in filing and paying taxes. A taxpayer/client must clearly understand this commitment. It would be foolish to secure a successful offer only to see it default later by a non-compliant act. 8. CONCLUSIVE SETTLEMENT - All questions of tax liability for the year(s) or period(s) covered by an accepted offer-in-compromise are "conclusively settled" absent "falsification or concealment of assets, or a mutual mistake of a material fact... sufficient to set aside or reform a contract". Substitute for Return assessments (SFR) by IRS can be compromised and the tax periods conclusively closed. 9. REFUNDS - IRS will keep any prior year refunds including refund due for the calendar year of acceptance. Clients should modify Form W-4 or 1040ES to eliminate the possibility of overpayments in the current calendar year. 10. TAX LIENS - Tax liens will not be released until total amount offered is paid. 11. EXTENSION OF COLLECTION STATUTES - An OIC will suspend the running of the 10-year collection statute from the time the offer is determined processible until the date of final decision plus 30-days. If rejection is proposed, the statute will continue to be suspended throughout any appeal process. 12. PUBLIC INSPECTION OF OFFERS - All accepted offers are available for public inspection for one year after acceptance in the district office where the taxpayer resides. The taxpayer's name, amount of tax debt compromised and amount of offer can be disclosed. We do not represent tax protestors; taxpayers attempting to hide assets and income "off-shore"; or those involved in abusive tax shelters and trusts.
Likewise, we
do not tolerate conduct or integrity violations by Service employees and
report such actions to the appropriate investigative authorities.
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