Below you’ll find a Question and Answer session produced by the IRS which explains the tax settlement process used for Offers in Compromise and gives detailed information about who qualifies, why the program was setup, and what you should expect if you need to file an OIC.
Note: The IRS conducts presentations via Phone Forums. These presentations are archived on the IRSVideos.gov website for individuals, small businesses and tax professionals. The links to all IRS phone forums are shown at the end of this phone forum transcript.
Q1. I have been asked to file returns for a taxpayer who has no assets, little income, and owes many years of taxes. After all tax returns past due are filed, can an OIC immediately submitted or should the OIC be filed after the returns are processed and notices are received by the taxpayer?
A. Taxpayers may submit, and the IRS will consider, an offer to compromise taxes due on returns which have been filed but have not yet been assessed. If the offer in compromise is received before the returns are pending or assessed, the offer will be returned.
Taxpayers must be up to date with estimated tax payments for the current year at the time the offer is filed and throughout the offer investigation. For individuals the amount of the estimated tax payment due is based on 100% of the prior year’s tax or 90% of the current year’s tax due at the time the offer in compromise is filed, whichever is less. To figure the current estimated tax due, see Publication 505, Tax Withholding and Estimated Tax, and Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ).
Q2. What are some other options if an OIC is rejected?
A. If an offer in compromise is rejected, the taxpayer has 30 days from the date of the rejection letter to file a formal appeal. If the taxpayer does not wish to appeal the rejection determination, they may speak with the offer investigator about possible alternative resolutions; such as an installment agreement. If the offer investigator is unable to assist the taxpayer with an alternative resolution, they will refer the taxpayer to the appropriate contact. See Publication 594, The IRS Collection Process, for more information about possible collection alternatives available to the taxpayer.
Q3. If a self-employed taxpayer submitted an OIC for several years, essentially compromising SE tax (minimal or no income tax), will the taxpayer be credited for social security and Medicare taxes for the compromised self employment taxes?
A. Yes, the taxpayer will receive credit for the amount reported on their tax return, whether collected or paid. In some instances, the IRS may determine that an adjustment to the assessed liabilities is in order and any changes to the original data will affect the initially reported Social Security and Medicare credits at that point.
However, if the offer has already been accepted, those adjustments cannot be made due to the contractual nature of the accepted OIC. Social Security and Medicare records would remain as originally reported.
Q4. If a contractor owes more than $75,000 for Form 941 taxes, including penalties and interest, would they be considered a good candidate for an OIC if they could submit $35,000 with their Form 656 and can show they have little or no equity in assets? Or would an installment agreement be a better option?
A. IRM 22.214.171.124 states: IRS will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. It goes on to say, “In cases where an OIC appears to be a viable solution to a tax delinquency… The taxpayer will be responsible for initiating the first specific proposal for compromise.” The taxpayer must make an adequate compromise proposal consistent with their ability to pay.
They will be given the opportunity to increase the OIC amount if the reasonable collection potential is determined to be more than the amount offered. Offers will not be accepted if it is believed that the liability can be paid in full through an installment agreement extending through the remaining statutory period for collection, or other means of collection, unless special circumstances exist.
Q5. Is an OIC acceptable for previous payroll taxes due? If so, please provide an example of a case where an OIC would be accepted and the contractor would be allowed to go forward.
A. The type of tax is not the deciding factor on whether an offer is a solution to a tax debt.
An offer should be considered as a viable solution if it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential Offers will not be accepted if it is believed that the liability can be paid in full as a lump sum, installment payments extending through the remaining statutory period for collection, or other means of collection, unless special circumstances exist.
Each offer is investigated and a determination is made based its own merit and circumstances, no examples can be provided.
Q6. Provide examples and reference citations for research purposes, regarding situations that would qualify as a special circumstance for granting an OIC due to economic hardship, compelling public policy or equity considerations.
A. Unfortunately, no specific examples can be provided since each case is considered under its own merit and consideration of special circumstances. The citation for special circumstances for an offer in compromise is IRM 5.8.11, Effective Tax Administration. Within that IRM section, are examples and basis for application of special circumstances and effective tax administration procedures.
Q7. Should more than one check be submitted with the OIC if I’m not sure of the total amount that IRS will accept as an appropriate offer amount or the number of installments? Since some amount is required – should this be the minimum amount we believe the IRS will accept?
A. If one makes a cash offer 20% of the total amount offered should be submitted. If the offer will be paid in installment payments, one must submit the initial payment and continue making the proposed payments throughout the investigation. A single payment for the total amount of the offer is not required. The taxpayer is responsible for initiating the first specific proposal for compromise and the offered amount should reflect their calculated reasonable collection potential.
If the final investigation reflects the taxpayer could pay more, the taxpayer will be given the opportunity to increase the offer amount. The full amount of the offer would then be due at the time of acceptance, depending on the agreed terms.
Q8. Are there guidelines for the dollar amount to be submitted for an OIC? What happens to the down payment submitted if the IRS determines that the amount the taxpayer sent in did not meet the required amount?
A. If a cash offer is sent, it must include 20% of the total amount offered. If the offered amount is to be paid in installment payments, the initial payment must be included with the offer and the taxpayer must continue making the proposed payments throughout the investigation. The taxpayer must make an adequate compromise proposal consistent their calculated reasonable collection potential. All payments are applied to the liability(s) and are nonrefundable.
Q9. Is there a minimum dollar limit for which the IRS will not consider an OIC? If so, what is dollar amount for which IRS will consider an OIC?
A. The IRS does not have a minimum or maximum dollar limit for to qualify for an OIC. There is no limit on the amount of the liability. However, an offer cannot be considered if the offered amount is zero. The taxpayer must make an adequate compromise proposal consistent with their calculated reasonable collection potential.
Q10. Is credit card debt considered a deductible expense when calculating personal deductible expenses for an OIC? Also, can payments and fees paid to a debt management company considered a deductible expense?
A. Credit card debt is an unsecured debt. Credit card debt is not an allowable expense for purposes of determining the reasonable collection potential for an OIC. Generally, payments and fees paid to a debt management company will not be considered as an allowable expense.
Q11. Please clarify that if a taxpayer obtains a loan to fund an OIC, the monthly loan payment would indeed qualify as an allowable expense for purposes of calculating the RCP in the income and expense section of the analysis.
A. Generally, if the loan is secured to fund the OIC and the taxpayer provides documentation of that fact, the loan payments would be allowed as an expense when calculating the RCP.
Q12. Does a taxpayer who currently has a wage garnishment qualify for an OIC? If the OIC denied, what happens to the payment submitted?
A. A wage levy does not prevent a taxpayer from submitting an OIC. If the OIC is rejected, all payments received during the investigation of the OIC will be applied to the liability.
Q13. Explain the comparison made of when tax liens are removed in the PPIA process vs. the OIC process. When, exactly, are the tax liens removed during the OIC process?
A. For an OIC, the Notice of Federal Tax Lien is released within 30 days of meeting the terms of the accepted OIC or the liability is paid in full, whichever comes first. For a PPIA, the lien is not released until the statute of limitations expires or the liability is paid in full, whichever is earlier.
Q14. What should a taxpayer do when there is a wage garnishment for tax due and wants to make payments on the amount offered in the OIC, but cannot afford to make both payments?
A. There is no requirement for the release of a levy that was served prior to the offer submission. The taxpayer’s circumstances should be considered when making a determination to release a levy or keep it in place while the offer is pending.
Q15. Is it true that when an OIC is accepted and paid in full, the IRS keeps refunds claimed on Form 1040 for 10 years following when the OIC was paid?
A. The IRS will keep any refund including interest due the taxpayer because of overpayment of any tax or other liability, for tax periods extending through the calendar year in which the IRS accepts the offer.
Q16. Since the amount acceptable for an OIC is the net value of current assets plus the income potential of a period of time (48 months), does this also mean that it is expected that the only way to make that offer is to be able to borrow the amount of the income potential from a source without collateral? Wouldn’t the funds available to cover the income potential be considered part of the current net assets?
A. (1) The taxpayers’ offer (absent special circumstances) must equal Reasonable Collection Potential, which includes equity in assets and future income value. IRS does not advise the taxpayer whether they should borrow the funds or what assets should be pledged as collateral. In certain instances, the offer amount will be provided by third parties who are willing to loan or gift the amount needed to fund the offer and not require collateral.
When a taxpayer is unable to fund a cash offer, the offer terms may also provide for payment of equity in assets over a period of time by submitting deferred payments.
(2)The equity in assets does not include future income potential.
As an example, the taxpayer has been making payments from their past income on a mortgage over a number of years. These payments have increased the equity in that asset. Future payments would also increase that equity, so rather than determining the possible future equity based on the payments, a calculation based on necessary living expenses is used to determine the future income value.
Q17. If an individual cannot pay his debt due to financial capacity (no assets and income is insufficient), should he request an OIC?
A. IRS will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. Generally, an offer amount must equal or exceed a taxpayer’s reasonable collection potential in order to be acceptable.
The exceptions are when special circumstances have been proven and warrant acceptance for less than the amount of the calculated RCP.
Q18. Explain the requirements for making tax deposits while applying for or when an OIC is accepted. Does this also include the trust fund portion of withholding taxes? Also, if an OIC is accepted, and then required monthly payments stop, is the OIC cancelled? If so, how can the OIC be reinstated or continued?
A. Taxpayers must remain in compliance while the offer is being considered. An untimely federal tax deposit made after assignment to an employee investigating the offer and during the investigation will result in a return of the offer.
It is necessary for the taxpayer to be current with federal tax deposits the quarter that the offer was submitted and remain in compliance with the filing and deposit requirements during the offer process. Regarding default and reinstatement see Q&A 22.
Q19. Is it true that there is a process of audit reconsideration when there is doubt of liability for a tax return? How is this different than an OIC or collection due process hearing? Provide statutory/regulatory citations/procedures.
A. In addition to a doubt as to collectability OIC there is a doubt as to liability OIC, Form 656-L. IRC Section § 7122 grants broad authority to the Secretary of the Treasury to compromise tax liabilities.
Treasury Regulation § 301.7122-1, is the authority to compromise a liability on any one of three grounds: Doubt as to collectibality, doubt as to liability, or to promote effective tax administration. A collection due process hearing is a procedure to allow consideration of relief from a collection action, such as a proposed levy or filing of a federal tax lien.
The documentation for a doubt as to liability OIC depends on the type of liability requesting to be compromised. This list below is generally the type of documentation requested:
copies of examination reports and substantiation for the examination finding(s) which the taxpayer believes is incorrect
original tax returns if the taxpayer disputes a Substitute For Return assessment
documentation to support reasonable cause claims for penalty offers
Q20. Explain the ETA basis of requesting an Offer In Compromise.
A. The ETA offer allows for situations where tax liabilities should not be collected even though:
The tax is legally owed, and
The taxpayer has the ability to pay it in full
No compromise to promote ETA may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws. An ETA offer can only be considered when IRS has determined that the taxpayer does not qualify for consideration under doubt as to collectability or doubt as to liability.
Q21. Is there anyway to have the interest/penalty forgiven due to economic hardship so the taxes due can be paid?
A. In the interest of ETA and equity, abatement of penalties based on reasonable cause must be made in a consistent manner and should conform to reasonable cause considerations specified in the Internal Revenue Code, Treasury Regulations, Policy Statements (P-2-7 and P-1-18), and IRM 20.1.
Reasonable cause relief is generally granted when the taxpayer exercises ordinary business care and prudence in determining their tax obligations but is unable to comply with those obligations due to circumstances beyond their control. Each case must be judged individually based on the facts and circumstances. Form 843 may be used to request the abatement. There are no provisions for interest forgiveness due to economic hardship.
Q22. Is there any way to have a defaulted OIC reinstated other than reapplying? Are there any other options for a defaulted OIC?
A. Once an offer has been identified as a potential default, the IRS will allow the taxpayer an opportunity to comply with the terms of the offer before defaulting. Once the offer is defaulted, the taxpayer must submit a new OIC and new Form 656.
Q23. IRM, 126.96.36.199(1)(a) permits modifications of an existing OIC. The procedures outlined indicate that the taxpayer should make the proposed payments in lieu of the original agreed monthly payments during the review/approval process of the new OIC terms. If a requested modification has been denied, what happens to the original OIC? The denial pattern letter (Exhibit 5.8.9-3 Pattern Letter 1607(P)) does not address a “catch up” situation for the shortage of payments made while the modification was being considered.
A. If the taxpayer’s proposal is denied and the terms of the original accepted OIC are not met, the OIC will be defaulted.
Q24. (2)How then can a recommendation be made to deny/default an accepted offer, requiring full “catch up” of the terms of the offer, when the IRM permits the taxpayer to make a proposal and live up to the terms of the proposal during the investigation, based upon a compliance issue in a non related entity?
A. An OIC that has been accepted for 1040 liabilities will not be defaulted because of a delinquency of the closely held corporation. However, once the taxpayer submits a proposal for an offer on an accepted offer and the new investigation determines the closely held corporation is not current with filing or payment requirements then the IRS has the latitude to deny the taxpayer’s proposal.
Q25. Are there any nonprofit organizations that help people with offer in compromise?
A. Low Income Taxpayer Clinic represent low income taxpayers before the IRS in audit, appeals, and collection issues, for free or for a nominal charge. There are LITCs in all states, and each has its own individual Low Income Taxpayer Clinic webpage.
However, we do not recommend using them unless it is an absolute necessity, as the speed, accuracy and quality of results is not as good as you would have by using a professional IRS tax attorney.
Some content taken from the IRS national phone forum, listed here
- IRSVideos.gov Individual Phone Forum
- IRSVideos.gov Small Business Phone Forum
- IRSVideos.gov Tax Professional Phone Forum
I hope you found this IRS Q&A on Offers in compromise helpful.
Until next time,
Jeff Fouts, Tax Attorney
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