Offer in compromise
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The Offer in Compromise (or OIC) program, in the United States, is an Internal Revenue Service (IRS) program under 26 U.S.C. § 7122 which allows qualified individuals with an unpaid tax debt to negotiate a settled amount that is less than the total owed to clear the debt. A taxpayer uses the checklist in the Form 656, Offer in Compromise, package to determine if the taxpayer is eligible for the offer in compromise program. The objective of the OIC program is to accept a compromise when acceptance is in the best interests of both the taxpayer and the government and promotes voluntary compliance with all future payment and filing requirements.
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[edit] Qualifying conditions
At least one of three conditions must be met to qualify a taxpayer for consideration of an OIC settlement:
- Doubt as to Liability — Debtor can show reason for doubt that the assessed tax liability is correct
- Doubt as to Collectibility — Debtor can show that the debt is likely uncollectable in full by the IRS under any circumstances
- Effective Tax Administration — Debtor does not contest liability or collectibility but can demonstrate extenuating or special circumstances that the collection of the debt would "create an economic hardship or would be unfair and inequitable." This Offer in Compromise program is available for any taxpayer, but is primarily used by individuals that are elderly, disabled, or have special extenuating circumstances.
[edit] Doubt as to collectibility
Doubt as to collectibility means that the taxpayer will never be able to fully pay the tax bill. The IRS will accept a settlement based on the following formula:
Settlement Amount = 60 months of disposable income + the equity in all the taxpayer's assets. (48 months disposable income in the case of offers paid within five months of acceptance.)
If a taxpayer believes he or she qualifies, the taxpayer completes a financial statement on a form provided by the Internal Revenue Service. Wage earners and self-employed individuals use Form 433-A. Form 433-B is for Offers involving all other business types. These financial statements identify all assets and liabilities as well as disposable income.
Disposable income is monthly income minus monthly expenses. For the example given, assume that disposable income is $100. That amount is multiplied by 48 or 60 months, resulting in a product of $4,800 or $6,000. That is the tentative minimum offer.
Now the taxpayer must add the taxpayer's equity in assets. The taxpayer is required to add the equity remaining after liabilities on the quick sale value of any assets that exceed US$7,720 in value for personal Offers, and US$3,650 in value for business Offers. The quick sale value of an asset is considered to be 80% of the fair market value (FMV).
The total offer amount is required by law to be at least the value of equity in assets plus disposable income over either the 48 or 60 months. If your minimum Offer amount is more than your tax liability, then you are not a candidate for the Offer in Compromise program. Some tax representation firms today sell customers on the idea of doing an Offer in Compromise for which they do not actually qualify, so a taxpayer must exercise due diligence themselves when considering submitting an Offer in Compromise either themselves or through a representative.
If you own a $200,000 home, for example, the quick sale value would be $160,000. If you owe $140,000 on your mortgage, you are left with $20,000 in equity. This amount must be included in your Offer.
However, as is usually the case, things are not this simple. If you can make a Lump Sum Cash Offer, in which you pay what you offer in five months or less from Offer acceptance, than you use a factor of 48, not 60 months as indicated above. Therefore, the minimum amount of your offer based on your income example would be $100 times 48, or $4,800.
Let's say that you also convince the IRS that your house could not be sold on the market that quickly or that there are other problems with a potential market sale. You could ask for a discount to "Quick Sale Value," or QSV, instead of Fair Market Value, FMV. If your QSV is less than what you owe on the house, and assuming you have no other assets, your actual potentially acceptable offer is $4,800 plus $0, or just $4,800 (assuming you can pay the Offer amount in 5 months or less).
If you cannot pay the amount of your Offer within 5 months, you may submit a Short Term Periodic Payment Offer. Under this payback plan, you must multiply your monthly disposable income by the lesser of 60 months or the remaining number of months in your statutory collection period, instead of 48. However, you can take up to 24 months to pay this Offer amount. During the Offer investigation, you must make the offered monthly payments towards the Offer, or the Offer will be automatically denied.
A third payback option, called a Deferred Periodic Payment Offer, allows you to pay the Offer amount over the remaining life of the collections statute. All Federal taxes in the United States have an initial 10 year statute of limitations on collection, starting from the date the tax was assessed. The statute is suspended during certain actions, such as during the time an Offer is being investigated, which extends the statute of collections by an equal number of days. Under a Deferred Periodic Payment Offer, you must include in your offer the realizable equity in assets plus the value of your monthly disposable income over the entire remaining life of the collections statute. For example, if you have 7 years remaining in your collections statute and have $100 per month in disposable income, you must include $8,400 in your Offer (84 months times $100 per month). If you have equity in assets, this Offer amount may result in payments that are higher than you would pay under an Installment Agreement, which indicates that an Offer in Compromise may not be your best solution. You must make the offered monthly payments during the investigation of your offer.
If you have less than 60 months remaining in your collection statute, then you are only required to offer the realizable equity in assets plus your disposable income over the remaining months of the collection statute. This rule applies regardless of whether you intend to submit a Lump Sum Cash Offer, Short Term Periodic Payment Offer, or Deferred Periodic Payment Offer.
If you cannot even do that, there is yet a third way to pay. You can offer to pay your monthly net income after allowable expenses (as determined by the IRS) over the life of the remaining statute on collection (originally 10 years). Lets say, you can pay $100 per month and there is 7 years (84 months) remaining on the statute. Then you will pay $100 per month for 7 years or $8,400.
[edit] Lowest acceptable offer
The above formula may be applicable in cases where you owe a very large sum and you have a significant amount of disposable income. However, "doubt as to collectibility" implies the inability to pay. The IRS has been known to accept offers in compromise as low as 10%, 1%, and $1 (One Dollar), but this is, as you can imagine, very rare.
If your disposable income is $0, you do not expect to have disposable income for some years, you have special circumtances, you have zero assets and if paying this debt would cause a hardship, the IRS has been known to accept ONE DOLLAR to settle your tax liability through the Offer In Compromise. Said provision takes effect 60 days after the signing.
In a recently accepted "Offer in Compromise" filed in 2006, a family experienced the disability of the primary wage-earner. The tax liability was incurred in 1994, and had been accruing interest and penalties (leading to thousands of dollars in tax liability.) The OIC form filed by the family included the required Form 433, Collection Information Statement and expense information (less than the accepted standard expense allowances for OIC formulation), as well as the fee waiver form that is applicable in low-income cases (this waives the otherwise required $150 OIC processing fee.) Because the family's expenses exceeded their income, the disability of the wage-earner and the lack of saleable assets, the IRS accepted their original offer of $1.
Recent tax legislation requires a taxpayer to make a 20% good faith payment with the offer-in-compromise. If the offer is rejected, the IRS can keep the 20% deposit. Caveat: Underestimating Reasonable Collection Potential
[edit] Partial payment
Effective July 15, 2006, the IRS made changes to the Offer in Compromise program requiring that an up-front twenty percent, non-refundable payment plus USD$150 be submitted along with the Offer of Compromise. An Offer submitted without the fees is subject to rejections without appeal. After the IRS receives the Offer, the IRS has two years to make a decision. If the decision is not reached by that time, then the Offer is automatically accepted.[1]
Under the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA 2005) if a taxpayer chooses to make payments over time, i.e. monthly, the taxpayer must include with the offer the first month's payment. The taxpayer is not required to submit the 20%, which applies only to the lump sum payment option. Then during the time that the offer is being considered by the IRS, the taxpayer must keep making the monthly payments to keep the offer current. If the taxpayer fails to make the payments, the offer will be returned to the taxpayer.
In the case of both the $150 application fee and either the 20% down payment or the monthly payments, a low income taxpayer may be exempt from both. The taxpayer should review the Form 656A to determine whether these fees and payments apply to them.
[edit] Effect of an Offer in Compromise on IRS levy or lien
An Offer in Compromise will have no effect upon a tax lien. The lien will remain in effect until the offer is accepted by the IRS and the full amount of the offer has been paid in full. Once the offered amount has been paid, the taxpayer should request that the IRS remove the lien.
An offer in compromise will stop tax levies under section 301.7122(g)(1) of the US Federal Tax Regulations.[2] That regulation states that the IRS will not levy upon a taxpayer's property while a valid offer in compromise is pending and, if rejected, for thirty days after the rejection. If the taxpayer appeals the rejection, the IRS cannot levy while the appeals process is ongoing.
[edit] Scams
In 2004, the IRS issued a consumer alert warning of promoters' claims to settle debts for "pennies on the dollar" through the OIC program.[3] The warning addressed companies charging high fees to consumers who may not be eligible for the program; all other payment means would have to be exhausted, including installment payments. A recommendation is to check with the Better Business Bureau before contracting any firm to resolve tax problems. In 2008, one of the largest tax representation firms in the United States, JK Harris & Company, settled a lawsuit with 18 states for fraud and misrepresentation, agreeing to refund $1.5 million to consumers and change the way it advertises.[4]
[edit] Notes
- ^ "Revamped Offer in Compromise Program Plays New Role in Collection Process, FS-2006-22, July 2006". IRS. http://www.irs.gov/newsroom/article/0,,id=159953,00.html. Retrieved on 2006-08-17.
- ^ 26 C.F.R. sec. 301.7122(g)(1).
- ^ "Check Carefully Before Applying for Offers in Compromise, IR-2004-17". IRS. February 3, 2004. http://www.irs.gov/newsroom/article/0,,id=120169,00.html. Retrieved on 2006-08-17.
- ^ http://www.illinoisattorneygeneral.gov/pressroom/2008_06/20080612.html
