What is the IRS “Offer in Compromise?”
The “Offer in Compromise” program offered by the IRS is designed to help those facing financial hardship move past the burden of tax debt. The program allows tax debt to be settled for less than the full amount of what is owed. In essence the program allows a candidate to offer an amount less than what is owed to permanently clear any back tax liabilities. In practice it can be much more complicated than that.
The offer in compromise is a potential option for anyone who can’t pay the outstanding liabilities in full without causing undue hardship. The program comes with many stipulations, and the burden is on the taxpayer to prove that the qualifications for the program are met.
Tax compliance is a prerequisite for filing an offer in compromise. The program is designed to help Americans with tax debt go back to being law abiding, tax paying citizens. A candidate for the program must both prove that they are in current tax compliance and that they will remain in tax compliance in the future. The IRS has the following requirements to ensure that is the case:
- All relevant tax returns must be filed with the IRS, and all liabilities assessed.
- The taxpayer must be current with all tax filings and tax deposits for the year of the filing.
- The tax payer must file and pay all taxes timely for five years after the acceptance of an offer in compromise. Violating this clause will retroactively void the offer and compromise.
If a candidate meets the prerequisites listed above, the next step in the process is to prove that the candidate cannot afford to pay the entire balance. There is what is called a full pay analysis that the IRS uses to determine if a candidate could full pay the liability in a reasonable amount of time based on current income and expenses.
If a candidate is in current tax compliance, and clears the full pay analysis, then the next step is to make an offer to the IRS. This may sound subjective, and there is a bit of subjectivity built in. However, the IRS has a very specific system for determining teh amount of an offer. It involves collecting expense data and comparing actual expenses to IRS standards and limits. It also involves substantiating the expenses and annualizing them and comparing them against all relevant income. The IRS also takes into account assets held. So even if there is no ability to pay based on income and expenses, if there is cash in the bank, the IRS requires that it be used towards the offer.
The IRS says that it generally approves an offer in compromise when the amount offered represents the most the agency can expect to collect within a reasonable period. The agency advises that you explore all other payment options before submitting an offer in compromise.
The IRS has posted an OIC Pre-Qualifier that confirms your eligibility and prepares a preliminary proposal.
There are different forms that need to be filed for an offer in compromise based on whether it is a business or and individual filing. Things also become more complex when more than one person is liable for the same tax, especially in the case of a husband and wife. If the liable candidate lives with someone who is not liable for the same tax, then the income of the other person is factored in when considering common expenses.
More Facts About the Process
While your offer is being evaluated:
- Your nonrefundable payments and fees are applied to the tax liability — you may designate payments to a specific tax year and tax debt.
- A notice of Federal Tax Lien may be filed.
- Other collection activities are suspended.
- The legal assessment and collection period is extended.
- Make all required payments associated with your offer.
- You aren’t required to make payments on an existing installment agreement.
- Your offer is automatically accepted if the IRS doesn’t make a determination within two years of the IRS receipt date.
If your offer is accepted:
- You must meet all the Offer Terms listed in Section 7 of Form 656, including all required tax returns and making all payments.
- Any refunds due within the calendar year in which your offer is accepted will be applied to your tax debt.
- Federal tax liens aren’t released until your offer terms are satisfied.
- Certain offer information is available for public review by requesting a copy of a public inspection file.
If your offer is rejected:
- You may appeal a rejection within 30 days using Request for Appeal of Offer in Compromise, Form 13711.
- The IRS Independent Office of Appeals provides additional assistance on appealing your rejected offer.