Offer in compromise
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.
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.
Doubt as to liability
Taxpayers who file an Offer based on a theory as to doubt as to liability (or DATL) will need to establish that they have not otherwise had an opportunity to dispute a tax liability. If the IRS can show that the taxpayer received the proper notices of assessment and failed to act on them, or otherwise contested the tax in the context of an audit, the taxpayer will not be able to seek this sort of relief. An Offer in Compromise based solely on the basis of Doubt as to liability does not require the submission of financial information.
Doubt as to collectibility
Doubt as to collectibility (or DATC) means that the taxpayer will never be able to fully pay the tax bill. The IRS will consider a settlement based on the following formula:
Settlement Amount = (monthly disposable income x a number of months) + the net realizable equity in the taxpayer's assets.
Disposable income is monthly income minus allowable monthly expenses. It is important to recognize that the IRS will not allow all expenses the taxpayer may actually have. Common disallowed expenses are college tuition payments for a dependent and credit card payments (disallowed since they represent unsecured debt).
The number of months over which disposable income must be calculated into the offer amount is based on the smaller of the number of months remaining until the Collection Statute Expiration Date (CSED) for the tax debt OR either 12 or 24 months, depending on the payment option for the OIC which the applicant is selecting.
Net realizable equity in assets is the quick sale value of the asset (often 80% of Fair Market Value (FMV)) minus any liabilities which are secured by the asset (e.g., a loan). As an example, if a taxpayer has a home worth $100,000 and owes $50,000 on the home, the IRS will calculate the net realizable equity in the asset as follows: ($100,000 x .80) - $50,000 = $30,000. The IRS expects, in this example, that the $30,000 will be included in the Offer amount.
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.
Effective Tax Administration
Effective Tax Administration (or ETA) offers may apply where the taxpayer is ineligible for an offer in compromise based on either a theory of Doubt as to Liability or Doubt as to Collectibility. The taxpayer must establish that collecting on the tax liability would cause economic hardship, or - in the alternative - "where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for accepting less than full payment."
Liabilities Eligible for Compromise
An Offer in Compromise can be submitted to settle any federal tax liability incurred under the Internal Revenue Code. This includes both business taxes (payroll, income, etc.) and individual taxes (income, trust fund recovery penalties, etc.).
An Offer in Compromise can only settle taxes that have already been assessed. In the United States, Income tax is considered assessed on the date the return is due(see tax day), or, if the return is filed after the due date, on the day the return is received. For income taxes in the United States, the due date is April 15. If a tax liability has not yet been assessed, it cannot be included in an Offer in Compromise. Certain taxes, however, are due throughout the year. And those taxes can be included in an Offer in Compromise.
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 US$186 be submitted along with the Offer of Compromise in the case of a cash offer.
An Offer submitted without the required 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.
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.
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. That regulation states that the IRS will not levy upon a taxpayer's property while a valid offer in compromise (an offer that has been accepted for processing) 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. If a levy is in place when the offer is submitted, it is not automatically released.
In 2004, the IRS issued a consumer alert warning of promoters' claims to settle debts for "pennies on the dollar" through the OIC program. 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.
- Internal Revenue Manual 22.214.171.124.2, item 2 (rev. Sept. 23, 2008).
- "Revamped Offer in Compromise Program Plays New Role in Collection Process, FS-2006-22, July 2006". IRS. Retrieved 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. Retrieved 2006-08-17.