Offer in Compromise Attorney
What is an Offer in Compromise?
An offer in compromise (OIC) is a type of agreement between both the taxpayer and the Internal Revenue Service (or the California state tax agencies) outlining and settling the taxpayer’s tax liabilities for less than the current balance due owed.
(If the taxpayer’s liabilities can be fully paid through the utilization of an installment agreement or any other related means, then the taxpayer would not ordinarily be eligible for an offer in compromise.)
For the purposes of discussion, we will use an offer in compromise between a taxpayer and the IRS as an example, but these requirements and rules are generally applicable to California state offers in compromises as well. In addition, it is possible to do a multi-agency offer in compromise (compromise an income tax and sales tax liability for example).
Brotman Law understands the tax procedure involved when evaluating an offer in compromise and the nuances of the process.
The application itself is designed for a complete disclosure of all financial assets and income, as well as to identify a number of specialty items that could lead to either an increase or rejection of the offer in compromise. We walk our clients through the pros and cons of the process and prescreen every client using the same criteria that the tax agencies use when evaluating an offer. If an accepted offer in compromise is the client’s ultimate goal, we will work with the taxpayer to increase their chances of acceptance.
In the negotiation that occurs during the offer process, we are tough negotiators and can often navigate an offer in compromise toward acceptance much easier because we are able to minimize the issues associated with it.
We invite you to speak with Sam about your liability and about the offer in compromise process. However, we have prepared this guide below to provide you with more information about the process and to answer some basic questions.
Concept Behind the Offer in Compromise Program
The concept behind an offer in compromise is fairly simple.
- The taxpayer makes an “offer” to the IRS to settle their past tax liability owed for a certain dollar amount.
- In exchange for the offer to compromise, the IRS seeks a lump sum or a series of payments over a short and set period of time.
- In addition, the IRS makes the taxpayer pledge compliance over a five year period and all returns must be filed and all liabilities must be paid on time in order for the tax liability to be wiped out.
Eligibility Restrictions for an Offer in Compromise
To be eligible for the offer in compromise program, the taxpayer must have:
- Already filed all tax returns
- Made the required estimated tax payments for the current year
- Made also all required federal tax deposits for the current quarter (IRS.gov, “Topic 204 – Offers in Compromise,” 8/21/2013).
Federal tax deposits are specific to business owners with employees or to corporate offers in compromise. Taxpayers currently in an open bankruptcy proceeding will not be eligible for an offer in compromise. In an open bankruptcy proceeding, tax liabilities and other financial debts are resolved through the bankruptcy process only.
Three Types of Offers in Compromise
If none of these restrictions apply to you, then the IRS will generally only accept an offer in compromise on three grounds.
1.Doubt as to Liability Offer in Compromise
If there is genuine doubt with regard to your tax liability or a dispute over the full amount owed, then you will need to complete Form 656-L, Offer in Compromise (Doubt as to Liability).
The IRS will accept an offer in compromise when there is a risk that the taxpayer may be able to resolve the liability through other means and that the risk to the government is substantial (as is often the case in litigation or appeals settings). Please note that the state of California does not have a doubt as to liability offer in compromise program.
2.Doubt as to Collectability Offer in Compromise
The most common types of offers in compromise are when there is a genuine doubt to whether the amount you owe the IRS will ever be fully collected (in actuality the review period is generally five years). This is called a Doubt as to Collectability offer in compromise.
3.Effective Tax Administration Offer in Compromise
Finally, the IRS has another catch all provision called “Effective Tax Administration.” This is where an offer in compromise may be accepted when there is no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances. In addition to submitting Form 656, taxpayers must also complete and submit and IRS financial statement in the form of a 433-A OIC (for individuals) or a 433-B OIC (for businesses).
It is important to note that penalties and interest will continue to accrue during the evaluation process.
- You must only submit an offer for tax years that have been assessed by the IRS.
- The taxpayer must submit all required forms and fees as part of the application process.
- The IRS offers guidance that provides insight into the process as well as application materials.
How Much Should I Offer? Minimum Offer Amount and Reasonable Collection Potential
Determining how much you should offer, whether minimum or maximum, is predicated on your understanding of the two types of offers and payment options the IRS will accept.
Choosing Between the Types of Offers
Lump Sum Cash Offer Requirements
A taxpayer may choose the lump sum offer, which is defined as an offer where the taxpayer makes five or fewer installment payments within 24 months after the offer is accepted.
“If a taxpayer submits a lump sum offer, the taxpayer must include with the Form 656, Offer in Compromise a nonrefundable payment equal to 20 percent of the amount. This payment is required in addition to the $150 application fee” (IRS.gov, “Topic 204 – Offers in Compromise,” 8/22/2013).
Under the offer in compromise requirements, the nonrefundable amount cannot be returned to the taxpayer if the offer is either rejected or accepted. Instead, it will be applied to the taxpayer’s liability.
Periodic Payment Offer Requirements
The periodic payment offer is defined as an offer where the taxpayer makes six or more monthly payments within 24 months after the offer is accepted.
When the taxpayer submits the offer, he or she must also submit the proposed installment payment along with Form 656. This payment is required in addition to the $183 application fee. Similar to the lump sum cash offer, the twenty-percent first installment payment is nonrefundable.
“Also, while the IRS is evaluating a periodic payment offer, the taxpayer must continue to make the installment payments provided for under the terms of the offer. These amounts are also nonrefundable” (“Topic 204”).
The first and successive installment payments are all applied to the tax liabilities.
The “taxpayer has a right to specify the particular tax liabilities to which the periodic payments will be applied” (“Topic 204”).
Pros and Cons of an Offer in Compromise
You must weigh the pros and cons of offer in compromise in light of the other options available to you. When considering whether to choose this option, you must also consider the advantages and disadvantages.
The offer in compromise allows you the opportunity to reduce your tax liability relative to your current financial situation.
Settling with the IRS by way of offer in compromise might be the second-best option.
For example, the requirements for accepting an offer in compromise are stringent. Taxpayers are required to have low monthly income and practically no assets.
“Thus you may end up wasting time and money on trying to [settle] with the IRS when that effort could have been applied toward a better method of resolving your tax liability” (IRSSolution.com, “Pros and Cons of An Offer in Compromise,” 8/24/2013).
Keep in mind that the IRS cannot collect on your federal tax liability forever.
“The Collection Statute Expiration Date (CSED) prevents the IRS from collecting taxes from after 10 years” (“Pros and Cons of Offer in Compromise”).
When the IRS considers an offer in compromise, it tolls it, or basically freezes it while your submission is under review.
“In other words, if you have an older liability, it might be a bad idea [to] pursue an Offer in Compromise because the CSED is about to expire” (“Pros and Cons of Offer in Compromise”).
On the upside of the pros and cons of offer in compromise, choosing to pursue an offer in compromise may be worthwhile in terms of reducing your tax liability to a level that is consistent with your current ability to repay.
The offer in compromise will put the activities of collectors on hold. Therefore, ongoing collection activities such as wage garnishments begin before you file the offer in compromise. They may also continue after the filing.
Although choosing offer in compromise, which is essentially requesting non-collectible status and allowing you to be taken out of collections without the fear of levy or garnishment, sounds good and may be an optimal choice in terms of reducing your tax liability, you still have to remember that the IRS can file a federal tax lien against you at any time.
If the IRS determines that you have an ability to pay, then the status of non-collectible may be removed and you will undoubtedly be required to begin paying at the income level with which you are able.
Appealing a Rejected Offer in Compromise
When the IRS rejects an offer in compromise, the taxpayer is notified by mail. In the letter, the IRS will explain the reason for the rejection and will also provide detailed instructions for how the taxpayer may appeal the decision to the IRS Office of Appeals.
All appeals must be made within 30 days from the date of the letter. Some offers in compromise are returned because the taxpayer:
- Failed to provide necessary information specific to filing for bankruptcy
- Failed to pay the application fee
- Failed to file tax returns and/or pay the current tax liability
In this case, returns are different from rejections. The taxpayer has no right of appeal when the application is returned.
Offer in Compromise Requirements – Collateral Agreements
A collateral agreement is specific to offers in compromise. A collateral agreement is defined as the ability of the government to “collect funds in addition to the amount actually secured by the offer or to add additional terms not included in the standard Form 656 agreement, thereby recouping part or all of the difference between the amount of the offer or additional terms of the offer and the liability compromised” (IRS.gov, “Part 5. Collecting Process, Chapter 8. Offer in Compromise, Section 6. Collateral Agreements,” 8/24/2013).
If the taxpayer refuses to enter into a collateral agreement, this refusal may serve as a basis for rejecting the taxpayer’s offer.
Keep in mind that collateral agreements are not used to accept an offer where the amount is less than the taxpayer’s current financial condition. Instead, a collateral agreement is specifically appropriate where “significant recovery is anticipated or securing a collateral agreement will facilitate resolution” (“Section 6. Collateral Agreements”).
Tips for a Successful Offer in Compromise
A larger number of offers in compromise applications are returned because they are incomplete. The IRS cannot process an offer if it is missing elements specific to applications and related documentation.
To be eligible, all filers must:
- Not have an open bankruptcy case
- Have filed all federal tax returns at issue
- Have filed payroll tax returns and deposits at issue for the last two quarters
- Pay the required application fee ($150)
- Complete and submit Forms 656, 433-A, and/or 433-B (if necessary)
- Be current with estimated taxes and income tax withholding for the current year
The most important tips for a successful offer in compromise are to:
- Pay the offer amount
- File all tax returns on time
- Allow the IRS to keep any tax refunds, payments, and credits to reduce your tax liability
- Continue to let the IRS keep any tax refunds payable to you even after the offer in compromise is approved.
Lastly, choose a tax professional to help you with the offer in compromise requirements. Because of the complexity of the process, taxpayers often hire a tax professional knowledgeable about the dynamics of the program. You want a tax professional that is experienced and knowledgeable about this area of tax law and truly understands your offer in compromise requirements.
IRS Offer in Compromise Rules – Salability of Assets
Salability, or marketability, is defined in terms of liquidity, “the ability to quickly convert property to cash or pay a liability” (IRS.gov, “Discount for Lack of Marketability: Job Aid for IRS Valuation Professionals, September 25, 2009, page 5” 8/25/2013).
Under the IRS offer in compromise rules, liquidity is essentially the ability to convert an asset into cash without losing the principal. Conversion is not only specific to the term asset; it may include any or all of the following:
- Business ownership interest
However, liquidity differs from marketability. Used interchangeably with marketability, salability is “the capability and ease of transfer or salability of an asset, business, business ownership interest or security” (“Discount for Lack of Marketability”).
Marketability is defined as the fact of salability. If it is liquid, then it is marketable.
However, if it is non-marketable, then it is illiquid. “Being illiquid does not necessary mean non-marketable – it may still be sellable but not quickly or without loss of value” (“Discount for Lack of Marketability”).
When evaluating a taxpayer’s assets, the IRS will determine the ability of the asset to be converted to cash in order to satisfy the federal tax liability. The IRS will take into consideration economic factors affecting marketability.
IRS Offer in Compromise Rules – Current Assets: Cash and Cash Equivalents
According to the IRS, (the payment of) credit cards do not fall under the category of necessary living expense. It is important to consider this fact when understanding the goal of the IRS in determining your ability to pay the federal tax owed.
Form 433-A will undoubtedly require the taxpayer to list all lines of credit and bank issued credit cards. On the form, the taxpayer must include the:
- Account number
- Credit limit
- Amount owed
- Available credit as of a particular date
In essence, the IRS encourages taxpayers to pay their federal tax liabilities using a credit card because the interest rate on the card is much lower than the interest rate plus penalties charged by the IRS.
The penalties and assessments of the IRS make it more difficult for taxpayers to repay the tax balance over time, whereas paying off the owed balance on a credit card would not incur the extra added penalties typically assessed by the IRS.
Long Term Assets
Long-term assets are defined as those that fall under the categories of stocks, bonds, real estate, and cash.
Taxpayers must list all long-term investments on Form 433-A. For the sake of the form, investments are defined as:
- Stocks, bonds
- Mutual funds
- Stock options
- Certificates of deposit
- Retirement assets
- Limited liability companies in which you have a business and/or financial interest.
You must calculate the total value of your interest, any loan balances, and the equity value (minus loan balance).
IRS Offer in Compromise Rules – Monthly Cash Flow
Monthly cash flow is determined as the ability of cash and/or earnings to come in and be expended out on a monthly basis.
Form 433-A requires taxpayers to outline and calculate all categories of monthly income whether generated as wages or through investment distributions; and calculate all categories of expenses, (those specific to necessary living).
To obtain the net difference, you must subtract total living expenses from total income.