What is an Offer
in Compromise?
An offer in compromise is a contract
between a taxpayer and the Internal Revenue
Service that resolves all of the taxpayer's
unpaid tax liabilities. The IRS has the
statutory authority to settle
or compromise any federal tax liabilities
by accepting less than the full
amount owed under certain circumstances.
The IRS may legally compromise the liability
for one of the following three reasons:
Doubt as to liability:
Doubt exists as to whether the assessed
tax is correct or properly owed.
Doubt as to collectibility:
Doubt exists about whether the
taxpayer could ever pay the full
amount owed. The minimum offer amount
must generally be equal to or greater
than the "reasonable
collection potential" (RCP). The
RCP is defined as the total of the
taxpayer's realizable value in real
and personal assets, plus the amount
that could be paid from future income.
Unless the taxpayer files an offer
claiming special circumstances
(see below), the offered amount must
equal or exceed the RCP. Realizable
value is an asset's quick sale value
(the amount which could be reasonably
expected through the sale of the asset)
minus what the taxpayer owes to any
secured creditor with a superior lien
on or claim against the asset.
Effective tax administration:
There is no doubt that the tax is
correct and no doubt that the amount
owed could be collected in full, but
exceptional circumstances exist such
that collection of the full amount
would create economic hardship or where
compelling public policy or equity
considerations provide sufficient basis
for compromise. The taxpayer bears
the burden of proof to show that the
offer qualifies on the grounds of
public policy or equity considerations.
This involves proving that the sufficiently
compelling to justify acceptance of
the compared to other taxpayers in
similar circumstances.
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What are the requirements for an offer in compromise?
For an offer to be accepted, a taxpayer
must meet all of the following requirements:
Used the most current versions of IRS
Form 656 -- Offer in Compromise, and
Forms 433-A and/or 433-B Collection Information
Statement as applicable. (The Form 656
was revised by the IRS in October 2004.)
Submit the $150 application fee, or
if warranted an executed Form 656-A --
Income Certification for Offer in Compromise
Application Fee seeking a waiver of the
fee.
File all required federal tax returns.
File and pay any required employment
tax returns on time for the two quarters
prior to filing the offer in compromise,
and demonstrate current compliance with
the requirement to make tax deposits
for the quarter in which the offer in
compromise was submitted.
The IRS will not consider an offer in
compromise from a taxpayer who is in
bankruptcy or who is involved in litigation
with the IRS, even as a partner in a
partnership.
The taxpayer must comply with all federal
tax filing and paying requirements for
a period of five years following acceptance
of the offer in compromise, or until
the offer in compromise is paid in full,
whichever is longer. This includes making
all required estimated tax payments and
federal tax deposits
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I qualify for an installment agreement; can I still submit an offer in compromise?
If a tax liability can be paid in a
lump sum or through an installment agreement
over the remaining life of the statute
of limitations on collection, you will
not be considered for an offer in compromise,
at least on the basis of doubt as to
collectibility. If such an offer in compromise
is received, it will be rejected with
appeal rights.
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The IRS recently levied my bank account. Will the levy proceeds be returned if I file an offer in compromise?
No, the IRS will keep all payments and
credits made, received or applied
to the total original tax liability before
the offer in compromise was submitted.
The IRS may also keep any proceeds from
a levy that was served prior to the submission
of an offer in compromise, but not received
at the time the offer was filed.
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Can I stop sending payments required under my approved installment agreement once I file an offer in compromise?
No. Installment agreement payments must
be continued while the offer in compromise
is being considered. Furthermore, installment
agreement payments will not be applied
against the amount you offer.
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Can taxes be settled
by offering "pennies on the dollar?"
An offer in compromise based on doubt
as to collectibility, to be accepted,
must provide for the payment of an amount
equal to or greater than the total liquidation
value of all assets, plus the amount
that could be paid from future income
after subtracting reasonable and necessary
living expenses. That total is called
the "reasonable collection potential" amount.
Offers are not considered or evaluated
on the basis of any magic percentage
of the debt. The IRS cautions that the
offer in compromise program is not designed
to provide an answer for everyone with
financial problems, and it is certainly
not a device for paying less than the
taxpayer can reasonably and properly
afford to pay. Shysters that promise
to "solve your tax problems for
pennies on the dollar" should be
avoided like the plague.
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Can I file an offer in compromise merely to delay collection action?
No. If it is determined an offer in
compromise was filed solely to hinder
or delay collection action, the IRS will
return the offer in compromise without
any further consideration and without
the right to an appeal. Lawyers, accountants
and other professionals who submit offers
merely to delay or hinder proper and
legal IRS collection actions are subject
to severe sanctions by the IRS.
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What is an offer in compromise user or application fee?
Federal agencies are authorized
to establish charges for services provided
(so-called "user fees"), and
indeed are encouraged to implement fees
to recover the cost of providing
special services to some people that
others do not use. Accordingly, the IRS
has established a user fee to recover
part of the cost of processing and reviewing
offer in compromise requests. The
IRS has chosen to call it an "application
fee" because the fee is required
when an offer in compromise application
is submitted for consideration.
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How much is the application fee and when must it be paid?
The application
fee for submitting an offer in compromise
is $150 and will be required on all offers
postmarked on or after November 1, 2003
. It must be submitted with the offer
in compromise package.
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What does the IRS review when I submit my offer in compromise materials?
The IRS first reviews an offer in
compromise to see if it is "processable." Processable
is the term the IRS applies to those
offer in compromises that have met certain
criteria. An offer in compromise is processable
if the taxpayer:
Used and properly executed the most
current versions of the required Forms
656 and 433-A or 433-B;
Submitted the required $150 application
fee or a request for a waiver
of the fee;
Filed all required federal tax returns;
Filed and paid any required employment
tax returns on time for the two quarters
prior to filing the offer in compromise,
and is current with deposits for
the quarter in which the offer
was submitted; and
Is not a debtor in a bankruptcy case.
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What happens to my fee if the offer in compromise is not deemed processable?
The offer package and the application
fee will be returned to the taxpayer
if the offer in compromise is determined
not to be processable. No appeal rights
are provided.
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What if my offer in compromise is processable but ultimately not accepted; will the application fee be refunded to me?
No. The IRS will retain the fee once
the offer is deemed processable, even
if the offer is rejected because the
amount offered is too low based on the
IRS's evaluation of the taxpayer's financial
condition. The taxpayer is given the
opportunity to increase the amount offered,
but if the taxpayer does not do so, or
demonstrate special circumstances,
the IRS will reject the offer.
Also, the offer will be rejected if
upon request the taxpayer fails
to submit additional financial documents
to assist in the IRS review. In this
case the offer in compromise will be
returned without further consideration,
and no appeal rights will be provided.
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Will the submission of inaccurate or incomplete forms affect the timely disposition of my case?
Yes. Over half of the offer in compromise
forms and financial statements filed
with the IRS require correction. The
IRS's procedures require that a taxpayer
be contacted in writing and given a one-time
opportunity to correct the errors or
update the collection information statement.
Failure to correct the errors will lead
to the offer being returned to the taxpayer
without any further consideration
by the IRS.
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What
are the most common errors when preparing
an offer in compromise?
The following are the most frequent
problems causing the IRS to demand corrections,
and thereby delaying the processing of
offers in compromise:
Missing name, incorrect address (don't
use a P.O. Box address) or missing
social security numbers or employer
identification
numbers on the Form 656.
Open tax liabilities for one or more
periods or years missing from the Form
656.
Listing tax periods on the Form 656
for which no tax is due.
No "offer to pay" amount
shown on the Form 656.
Form 656 altered in some way (i.e.
pen and ink changes made on the offer
in compromise form, attempting to change
the terms of the contract).
Form 2848 Power of Attorney not attached
if the offer is submitted by a taxpayer's
representative.
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What happens if the
IRS accepts an offer in compromise?
If an offer in compromise is accepted,
the following conditions apply:
The taxpayer must pay the offer in
compromise amount as quickly as possible
and in accordance with the terms
of the accepted agreement.
The IRS will keep any tax refund,
including interest due, as the result
of an overpayment of any tax or other
liability for all tax periods extending
through the year the IRS accepts the
offer in compromise.
A taxpayer may not designate a refund
to be applied as an estimated tax
payment for the following year. (This
condition does not apply if the offer
is based on doubt as to liability only.)
The taxpayer waives the right to
contest, in court or otherwise, the
amount of the tax liabilities compromised.
If a Notice of Federal Tax Lien has
been filed against a taxpayer,
the IRS will release it, but only
when the payment terms of the offer
in compromise are satisfied.
The taxpayer must remain in full
compliance with all filing and payment
requirements for all tax returns due
for five years from the date the offer
is accepted, or until the offer amount
is paid in full, whichever is longer.
Failure to pay on time, or to remain
in compliance
during the five-year period (or until
the offer is paid in full, whichever
is longer), will result in the offer
being declared in default. This means
that the previously compromised liabilities
will spring back to life, and all
appropriate collection actions will
be pursued by the Service.
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What happens if the
IRS does not accept my offer in compromise?
If an offer in compromise
is not accepted and a written rejection
notice is issued, you will be given the "opportunity" to
withdraw the offer and propose another
payment method. But if you decline the
request to withdraw the offer, you will
have the right to file a written protest
and then discuss the merits of the offer
in compromise case with an independent
IRS Appeals Officer who has had no previous
involvement with the case.
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How
much interest do I incur if my offer
in compromise is accepted?
Interest will not accrue on the taxpayer's
accepted offer in compromise amount from
the date of acceptance until the date
the offer is paid. However, interest
and penalties will continue to accrue
on the unpaid tax liabilities while the
offer in compromise is under consideration.
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Will I be entitled to receive tax refunds
if my offer in compromise is accepted?
As additional consideration beyond
the amount of the taxpayer's offer,
the IRS will keep any refund and interest
due because of an overpayment of
any tax or other liability for all
tax periods extending through the
calendar year the IRS accepts the offer.
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Can
I "designate" any
payments once my offer in compromise
is accepted?
No. Refunds and overpayments
may not be designated as estimated
tax payments for the following tax year.
(This condition does not apply if
the offer in compromise was accepted
under doubt as to liability only.)
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Is a tax lien released
when an offer in compromise is accepted?
The IRS will release all previously
filed liens, but only when all of the
terms of the offer in compromise are
satisfied. For an immediate release
of a lien, a taxpayer can submit payment
using certified funds, or seek a
release of the lien, a discharge of specific
property from the effect of the lien
by filing a proper application in accordance
with published IRS procedures.
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What happens if I do not
meet all the terms of my accepted offer
in compromise?
The IRS may "default" the
offer and reinstate the entire tax liability,
less payments received. The IRS can then
file suit to collect the entire unpaid
balance of the offer in compromise, or
to collect an amount equal to the original
tax liability as liquidated damages,
minus payments already received under
the terms of the offer. Also, the IRS
can file a Notice of Federal Tax Lien
for all tax periods for which taxes are
once again owed because of the default.
And following its normal procedures,
the IRS can file levies to collect the
amount of tax owed.
The IRS will not default your offer
in compromise agreement if you filed
a joint offer with your spouse or ex-spouse,
as long as you have complied and continue
to comply with all of the terms of the
agreement, even if your spouse or ex-spouse
violates those terms.
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What happens if I don't
file my tax return or pay my taxes next
year?
The offer in compromise will be defaulted.
As explained above, an offer in compromise
requires future compliance for a period
of five years from the date of acceptance
of the offer, or until the offered amount
is paid in full, whichever is longer.
Compliance is the timely filing
and payment of all required returns and
taxes.
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Disclaimer
This publication
and the information included in it are
not intended to serve as a substitute
for consultation with an attorney. Specific
legal issues, concerns and conditions
always require the advice of appropriate
legal professionals.
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