Listen to an audio transcript of an IRS Enrolled Agent explaining the process of filing an offer in compromise, and who may file for an OIC.
Note: This audio content was created by a third-party and is provided here for informational purposes. A link to any original content is included at the end of this article.
This is a podcast from the IRS Case Resolution Alternatives Collection Policy. This is a reenactment of the presentation the National OIC Program manager delivered for the IRS’s National Phone Forum. The phone forum is titled “IRS Collection Process: What are your options?”. This segment will cover offers in compromise.
What is an offers in compromise, or OIC
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.
Internal Revenue Code section 7122 grants the IRS broad authority to accept an offer in compromise. Also, IRS Policy Statement P-5-100 says the IRS will accept an offer in compromise if payment of the taxes in full is unlikely and the amount of the offer reasonably reflects collection potential.
The IRS recognizes that it is both sound business practice and good tax policy to settle some cases for less than the total amount due. An offer in compromise is the administrative mechanism for reaching such a settlement.
Next, I’ll discuss who qualifies for an offer in compromise. Generally, taxpayers who are unable to fully pay their liability in a lump sum, or through a payment agreement, qualify for an offer in compromise. The key is the taxpayer’s ability to pay. If the taxpayer has the ability to full pay through a lump sum payment or through an installment agreement, they generally will not qualify for an offer in compromise.
Unless special circumstances are present, the IRS won’t accept an OIC for less than the taxpayer’s reasonable collection potential. Reasonable collection potential is defined as the taxpayer’s total realizable value in assets plus the value of their future income.
The objectives of the OIC program
Achieve a resolution that is in the best interest of both the individual taxpayer and the government;
Provide the taxpayer a fresh start toward future voluntary compliance with all filing and payment requirements;
Effect collection of what can reasonably be collected at the earliest possible time and at the least cost to the government; and to Secure revenue that may not be collected through any other means.
There are three reasons a taxpayer may submit an OIC:
- The first reason is doubt as to collectibility. Doubt as to collectibility occurs when doubt exists that the taxpayer could ever pay the full amount of tax owed over the life of the collection statute. This is the most common basis of submission of an OIC.
The second: doubt as to liability, which occurs when doubt exists that the tax assessed is correct.
The third and final reason is effective tax administration or ETA. Under ETA, there is no doubt that the tax is correct and no doubt that the amount owed could be collected in full.
However, exceptional circumstances exist such that collection of the full amount would create economic hardship or compelling public policy or equity considerations which would cause the general public to question whether the collection of the tax liability is fair and/or equitable. The taxpayer bears the burden of proof to show their OIC qualifies for ETA consideration.
The keys to successfully navigating the OIC process
Explore all collection options before deciding to submit an offer in compromise; Avoid omissions and mistakes by carefully completing the financial statements and the Form 656; Complete the processability checklist, which is included with the OIC Booklet, to determine eligibility; Ensure that the taxpayer is current with all filing and paying requirements; Include all required fees and payments; and Respond promptly to requests for additional information in order to avoid the offer being returned.
The IRS recently released Form 656-B, Offer in Compromise Booklet. The new Form 656-B contains all of the worksheets, forms, applications and instructions necessary to file an OIC. The Form 656, Offer in Compromise, is included in the Form 656-B, but it is also now available as a separate four-page PDF document on IRS.gov.
Some features of Form 656-B include
The current Form 433-A, Collection Information Statement for Wage Earners and Self Employed Individuals, revision January 2008;
Form 433-B, Collection Information Statement for Businesses, revision January 2008;
Revised IRS Offer in Compromise Low Income Guidelines table based on the 2009 U.S. Department of Health and Human Services standards; Revised Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment; and a Revised Worksheet to Calculate an Offer Amount. The worksheet was revised to be used with the new Form 433-A.
Next, I’ll cover the new OIC economic challenge initiatives and related procedures.
In response to the economic challenges that many taxpayers are facing, the OIC program now includes some changes.
The first procedure is an additional review of real property valuations. In some cases, the equity taxpayers have in real property can be a barrier to an OIC being accepted. With the uncertainty in the housing market, the IRS recognizes that the real-estate valuations used to determine ability to pay may vary. Therefore, in cases where the accuracy of a real-estate valuation is in question, the case will be forwarded to the Non-Economic Hardship – Effective Tax Administration, or NEH-ETA, group in Austin, Texas, for a second look at the value of the property.
The NEH-ETA group will investigate the property value and continue negotiation with the taxpayer to attempt to achieve an agreeable offer, if appropriate. The process is an internal process; taxpayers do not elect to use it.
The second procedure involves the prevention of accepted OIC defaults. Taxpayers who are unable to meet the terms of their offer agreement and who are in potential default of an accepted OIC now receive a letter advising them of their options. This process allows the taxpayer to renegotiate the terms of the original offer or adjust the original amount of the offer to ensure we agree to a compromise that is in the best interest of both the taxpayer and the government.
The IRS OIC Program has experienced many improvements
The first is increased OIC receipts. Offer receipts for fiscal year 2008 totaled 43,989. OIC receipts as compared to the same period last year are up 14 percent. Additionally, OICs received with the Form 656-A (low income waiver) represent 33 percent of total receipts.
The IRS has also seen continued improvement in the processing time of OIC cases. For example, 92 percent of offers processed by our Centralized Offer in Compromise sites are currently closed within six months or less. And, 72 percent of offers worked in our field groups are currently closed in nine months or less (this is up from 59 percent in 2005).
Another improvement is the “not-processable” rate of return, which is currently 10 percent. In 2006, the non-processable rate of return was 26 percent. Keep in mind, there are only three reasons an OIC can be returned as not-processable.
- The taxpayer is in bankruptcy.
- The $150 application fee or a completed Form 656-A is missing
- The required TIPRA payment or a completed Form 656-A is missing.
More OIC resources are available at IRS.gov, including Form 656-B, Offer in Compromise Booklet and by using the Search term, OIC.
This is an audio webinar explaining the IRS Collection Process. If you have more questions please contact us to learn how we can help you file an IRS offer in compromise.
Original source material is from the IRS website.
