Offer in Compromise

Is an Offer in Compromise right for me?

By | Offer in Compromise, OIC

It is sometimes possible to wipe your tax slate clean at an enormous discount. If you qualify for something known as the offer in compromise, referred to as an “offer” or “OIC,” the IRS has been known to accept as little as 1% of the amount owed on a tax bill and call it even.

There is no legal right to have a valid tax bill reduced by the IRS — it is entirely a matter of government discretion. In all but a few instances, however, the IRS must at least give a properly submitted Offer in Compromise fair consideration. Unfortunately, in recent years, only 25% or so of the OICs submitted were accepted by the IRS, although you do have the right to take a rejected Offer in Compromise to the IRS Appeals Office.

 Offer in Compromise Process

Submitting an offer to the IRS is a formal process — you can’t simply call the IRS and say “Let’s make a deal.” You start by completing IRS Form 656, Offer in Compromise.

There is a $186 application fee for filing an OIC, which you must attach to Form 656. You might be exempt from the fee if your monthly income is below the poverty guidelines. If you claim the poverty guideline exemption, you must submit an Application Fee Worksheet from the Form 656 booklet.

If you are offering to pay in five payments or fewer within five months or less, you must send in a minimum of 20% of the offer with your application. If you’re going to take longer than five months to pay, you must pay the first installment with your offer and you must continue to make all proposed payments while the offer is pending. All these payments, including the application fee, are nonrefundable but will go towards the unpaid tax liability (except the application fee).

In addition to Form 656, you must submit a Collection Information Statement, or Form 433-A. If you are married and live in a community property state, the IRS may request that your Collection Information Statement include data on your spouse — even if you alone owe the IRS. Take particular care in filling in this form correctly if you are serious about your Offer in Compromise. The IRS scrutinizes the disclosures you make in this form much more closely when considering an OIC than when you request to pay your taxes with an installment agreement.

 Downside to Submitting an Offer in Compromise

Completing the forms is just the beginning. After you submit the forms, the IRS will ask you for rafts of financial documentation — pay stubs, bank records, vehicle registrations, and myriad other items. This is an exhaustive, time-consuming process. Some taxpayers wind up submitting box loads of documents to the IRS to support their OIC request.

There’s another drawback to submitting an OIC. If your OIC is rejected, the disclosures you made about your assets give the IRS all the information it needs to accelerate its collection efforts against you. For this reason, it makes sense not to submit an offer unless it is likely to be accepted.

In addition, remember that interest keeps accruing during the offer in compromise negotiation process, meaning you’ll end up owing more than ever if you don’t eventually make a deal.

 Do You Qualify for a Offer in Compromise Consideration?

Merely wanting to make a deal with the IRS is not enough — everyone would like to have his tax bill reduced. To qualify for OIC consideration, you must show the IRS that one of the following conditions exists:

  • There is some doubt as to whether the IRS can collect the tax bill from you — now or in the foreseeable future. The IRS calls this “doubt as to collectibility.”
  • Due to exceptional circumstances, payment of your full tax bill would cause an “economic hardship” or would be “unfair” or “inequitable.”

Taxpayers who want to file a “doubt as to liability” offer must file Form 656-L. This offer is based on a claim that there is doubt as to whether the tax liability assessed is correct. This is an unusual and more difficult avenue to pursue.

 How Much Should You Offer?

According to the IRS, the amount of an OIC must be equal to the “realizable value” of your assets plus the amount of money the IRS could take from your future income. For example, if your assets are worth $17,200 and the amount of your future income that’s available to the IRS is $14,800, your minimum offer must be $32,000.

 Special Circumstances

What if you determine the offer amount required by calculating the realizable value of your assets and your available future income, and the result is well beyond your ability to pay? Consider making an offer anyway (assuming you aren’t worried about the IRS grabbing any assets you didn’t reveal). IRS personnel have some leeway to accept less money than is required under strict application of the rules.

The IRS gives special consideration to people with physical or psychological infirmities. In particular, the IRS has always favored offers from people with bleak financial prospects due to advanced age — over 60 in particular. And the IRS will consider HIV or drug- or alcohol-related problems, as well as a family member’s problem if it has a detrimental financial effect on you.

The best way to bring special circumstances to the IRS’s attention is through a letter attached to your Collection Information Statement (Form 433-A). It doesn’t have to be formal or fancy, just one or two pages telling your tale of woe. You’ll also need to attach statements from doctors and medical records indicating your condition. If the medical data doesn’t show how the condition prevents you from earning much of a living now or in the foreseeable future, explain this in your own words.

 If Your Offer Is Rejected — Keep Trying

The IRS must give you a written explanation if your offer is not accepted. The IRS usually rejects offers in compromise for one of two reasons:

  • The offer is too low.
  • You are a “notorious” character — for example, you’ve been convicted of a serious crime.

If the offer is too low, the IRS letter will state what amount is acceptable. You are also entitled to a copy of the report that lists the factors that caused the rejection. Ask the IRS for a copy. If the IRS won’t give it to you, make a request under the Freedom of Information Act.

After finding out why your offer was rejected, resubmit your offer. The revenue officer or special procedures officer might help you come up with a way to make your offer acceptable.

You don’t need to submit a new Form 656 if you submit a new offer within a month, if your financial circumstances have not appreciably changed and if the new offer is not radically different from the old one. Instead, write a letter. State that you wish to change your offer by increasing the amount of cash.

To submit a significantly different offer, you need to complete another Form 656.

 Appealing a Rejected Offer in Compromise

You can formally appeal a rejected offer in compromise, or you can call the person who signed the letter and try to get her to change her mind. Often, instead of forwarding appeals to the Appeals Office, the IRS will reconsider your offer and engage in further negotiation.

To start a formal appeal, send a letter within 30 days of the date of the rejection letter, such as:

I wish to appeal from the rejection of an offer in compromise submitted June 20, 2011, and rejected on January 7, 2012. I request a conference.

Your appeal to a rejected offer in compromise will not be seriously considered unless all of the following are true:

  • You furnished all of the data requested by the IRS during your offer processing.
  • You have filed all past tax returns.
  • You are current on your tax payments for the present year. Self-employed people need to have made all quarterly estimated tax payments; employers must have made all payroll tax filings and deposits.

Appealing is not a legal right — it’s within the IRS’s discretion. You cannot take the IRS to court for rejecting your offer or your appeal.

Offer in compromise program OIC

By | Offer in Compromise

The Offer in Compromise program OIC is authorized by federal tax law. The program is older than the income tax, allowing revenuers in the 1800s to compromise excise tax liabilities. The Internal Revenue Service takes the offer program seriously and to be successful, the taxpayer must also. Preparing an offer goes far beyond filling in the blanks. The offer must present an overall picture of a deserving taxpayer. Today, there are three ways to compromise income tax liability under federal law.

If the taxpayer does not believe he or she owes the tax and wants to settle by compromise, the taxpayer can file an Offer in Compromise based on doubtful liability. If the taxpayer simply does not have the resources to pay the outstanding obligation, the taxpayer can file an Offer in Compromise based on doubtful collectibility. Since 1998, the taxpayer can also seek to compromise the tax obligation on the basis that it is good public policy or that it is simply equitable.

To successfully compromise a tax liability based on collectibility, it is the taxpayer’s job to convince the Internal Revenue Service that they will receive more by acceptance of the offer than they will obtain by proceeding with collection remedies. However, some assumptions applied by the IRS in reviewing an offer are actually more liberal than the results should the Internal Revenue Service attempt collection. For example, a taxpayer who collects his salary on a monthly basis may have only $800 in take home pay after garnishment of his wages. The Internal Revenue Service therefore allows the taxpayer an amount equal to his or her (hereafter “his”) reasonable expenses, assuming that the taxpayer will not stay at the job if the taxpayer is not allowed enough money to live on.

If the offer is location sensitive (valuation of real estate), it will be sent back to a local IRS group. The information is initially reviewed for processability. If the taxpayer a) hasn’t filed all required returns, b) is in bankruptcy, or c) is in business with employees and has not been in compliance with 940/941 filing and depositing requirements for the two preceding quarters and the current quarter, then the offer will be returned as non-processable.

If, from the information provided by the taxpayer, it is obvious that the offer is less than the IRS would otherwise collect, the offer is also returned non-processable. Unfortunately, the IRS has taken the position that incomplete offers (such as omitting the vehicle mileage) are returned. Offers may also be returned if the government determines that the sole purpose of the offer is to delay collection.

Once the offer is found to be processable, it is “processed” and freeze codes are input into the computer to stop collection action. The IRS must cease all collection activity, unless collection of the tax liability is determined to be in jeopardy (which is a rare event). If the taxpayer receives any notices during the offer process, a follow up should be made to ensure that the offer has been properly coded in the system.

The offer then awaits assignment to an offer specialist. The goal of the IRS is to process offers within a six-month time frame and it appears that most offers are being processed within that time frame. A new law that just went into place last year, states that the IRS has 24 months to process an Offer or it is automatically deemed accepted. Offers that present no novel issues may be accepted without further communication, or after a rather simple request for additional information or clarification.

If the case is referred to a local IRS office, the taxpayer will receive a letter notifying him of an assignment to a revenue officer who will be contacting the taxpayer, or their representative in the near future. Once the revenue officer begins working the case, the case will again lie dormant until the offer reaches the top of the pile. The process will then move very rapidly.

If the revenue officer feels the amount offered is inadequate, he will usually supply his calculations that will lead to a minimum offer amount. In effect, this is a counter-offer. Counter-offers are based upon the IRS’s ability to collect, not upon the amount owed.

Counter-offers will arise from differences in opinion between the offer specialist and the taxpayer as to the value of assets (usually the house or car), as to the actual income of the taxpayer, and as to the necessity of the taxpayer’s expenses.

Each rejection is given an independent review by an independent administrative reviewer, a position created as a result of Section 3462 of the 1998 act. The independent administrative reviewer must review all offers prior to communicating such rejection to the taxpayer. The taxpayer can appeal the rejection in most cases and may have more luck with the appeals officer. Likely areas of appeal are valuation problems and issues having to do with the necessity of expense items, such as cost of travel to work. Today, nearly 70% of all valid Offers are rejected by clerks failing to give the Offer a thorough review, leading to more and more appeals.

If the revenue officer recommends acceptance, it goes to his group manager for review. Upon acceptance, the taxpayer receives a letter outlining the terms and a copy of the offer executed by the Internal Revenue Service.

In determining the Offer amount, the offer specialist is charged with determining the amount of unpaid tax liability that can be collected by (1) liquidating taxpayer’s assets (Valuation Issues) and (2) through an installment plan with respect to taxpayer’s income (Income Issues).

Valuation Issues – In the case of assets, the issue is how much the Internal Revenue Service will realize if the IRS seizes the assets and auctions them rather than how much the taxpayer can get through careful marketing.

First, you are going to have to offer an amount exceeding the cash the IRS could raise if they come in and sell all your assets (current IRS valuation is 80% of FMV). Therefore, you have to have some outside source for obtaining the offer funds. This would generally be a loan or gift. However, the IRS cannot make you borrow from your credit cards, life insurance or 401k plans, so these may also be sources of funds.

The IRS requires the last three months of personal bank statements. The offer specialist will determine the average personal checking balance and subtract one month’s necessary living expenses from it. Any excess will be considered a cash asset. Total balances in all savings accounts will be added to that to determine total cash assets available. It is imperative that the bank statements tell the same story as the financial statements submitted with your Offer. If the deposits on the bank statements exceed the income figure, this needs to be explained (loans, inheritances or the like).

If the taxpayer is self-employed, the business will be considered an asset. However, if the hard assets of the business (accounts receivable, equipment, operating capital) are liquidated, the resulting income will disappear. Therefore, where the primary source of income is the business, do not count the accounts receivable as an asset and also count the money coming in from those receivables as income.

If the taxpayer is self-employed, the business will be considered an asset. However, if the hard assets of the business (accounts receivable, equipment, operating capital) are liquidated, the resulting income will disappear. Therefore, where the primary source of income is the business, do not count the accounts receivable as an asset and also count the money coming in from those receivables as income. If the business is profitable, it should continue. If not, it should be liquidated. The value of the business then becomes the net value of the assets in the forced sale scenario. Accounts receivable can either be, allocated to the business, or to future income, but not both.

When collecting, the Internal Revenue Service steps into the shoes of the taxpayer. If the taxpayer cannot liquidate his retirement plan without terminating employment, the asset has no value to the IRS. However, it must be listed and should include an explanation as to why it cannot be liquidated.

The IRS can levy retirement vehicles such as IRAs. Since voluntary liquidation will generate a tax and penalty, the IRS will allow a discount to reflect the payment of tax and penalty upon liquidation, but only if you are going to liquidate the IRA to pay the offer amount. You must include the entire amount.

At this point, the potential for bankruptcy should be mentioned. Income taxes that are due at least three years before filing the bankruptcy, if the returns were actually filed at least two years before the petition and the taxes were assessed at least 240 days before the petition, may be dischargeable. In the case of IRAs, bankruptcy courts will weigh the needs of the creditors against the needs of the bankrupt in determining whether the IRA is protected. The IRS should, and often will weigh the bankruptcy option in valuing the offer. If the taxpayer is a candidate for bankruptcy, he should probably begin with a bankruptcy analysis. The offer program is often referred to as the IRS bankruptcy equivalent.

Automobiles seem to be the hardest asset to reach agreement over. The IRS rarely realizes the value of an automobile at auction and it is extremely unlikely that the IRS will realize low blue book value. However, the offer specialist is likely to argue that the correct value should be somewhere between low blue book and retail. It is essential that all automobiles be listed because the offer specialist will check with the DMV for all vehicles registered in the taxpayer’s name. This includes vehicles recently transferred out of the taxpayer’s name (there is a box that requires disclosure of any recent transfers for less than full value).

The Internal Revenue Service has historically allowed a 20% discount from the fair market value of real property, i.e. your home. This is called “quick sale value.” It means that a home for which a taxpayer recently paid 20% down will be reflected as having zero equity.

If the taxpayer owns a home he should obtain an appraisal or a good market analysis. The IRS will sometimes ask for backup documentation if the taxpayer resides in an area with increasing home values. The form asks for the amount that the taxpayer could sell the property for “today,” which suggests quick sale vale. We believe that this allows the 20% discount from true market value that is based upon presenting the home in its most favorable circumstances to be taken.

Under the community property law of some states, all community property is responsible for the debts of either spouse. However, a house held in joint tenancy, if in fact it is a true joint tenancy, is deemed held one-half by each spouse and presumably would support the same type of discount that fractional interest holders claim. A prenuptial or even post nuptial agreement separating property, if executed at a time in which no fraudulent conveyances are occurring, can equally separate the property. Therefore, review of title to property and of marital agreements may be productive.

The statute provides exemptions from levy and these exemptions apply when valuing the assets. A taxpayer may exclude a certain amount in tools and equipment used in a trade or business, and a certain amount in furniture and household belongings. The IRS will apply these exemptions. However, the taxpayer may want to address the exemptions. For example, in some cases it may be possible to argue that an automobile should be eligible for the exclusion as a tool required in a trade or business.

Income Issues – Most taxpayers that fail to qualify for an offer, fail because they are able to pay from income that they have offered. The offer specialist determines the monthly amount that the Internal Revenue Service will receive under an installment agreement from the taxpayer’s financial information submitted. To arrive at the offer amount, the offer specialist merely multiplies the monthly income times 12/24 months. If the taxpayer can make payments of $100 per month, the offer amount must be at least $1200/$2400 (plus that value of the taxpayer’s assets).

Historically, the 12/24 multipliers are approximately the present value of 1/2years of collection. The time frame arises from the old six-year statute of limitations, less one year to reflect the average time it took a taxpayer to file the offer. Since the present value of a 1/2 year stream of income was approximately equal to 12/24 times the monthly amount available under an installment agreement, the current practice is to calculate the amount available to the IRS for offer purposes by multiplying the monthly income available by 12/24 if the taxpayer can pay the offer amount within 90 days of acceptance. A new law currently in place, will allow the taxpayer to pay of in up to 24 months.

For the wage earner, the income side of the equation is fairly easy. For self-employed individuals, net income is supposed to be a realistic projection. Last year’s net income is acceptable. If the projection differs from the taxpayer’s previous year’s schedule C (or E in the case of a partnership or S Corporation), the taxpayer needs to attach an explanation.

In most cases, this explanation of projected income is the single most important attachment to the offer. In it the taxpayer can explain the trends in the industry, problems internal to the company, contingent liabilities and a host of other limiting factors.

The taxpayer is allowed by the Internal Revenue Service to apply certain National Standards as expenses related to transportation, household goods, and housing allowances. These are derived from IRS charts and vary by income level and the number of persons in the household. The amounts are updated periodically and can be found on the IRS website.

The taxpayer is always able to offer information that will allow a variation from the standard, but variation is rare. This expense category is based on national averages and is a substitute for actual monthly expenditures. An individual with no dependents earning $3,000 per month is entitled to $556 per month, while a family of four earning $6,000 per month is entitled to $1,546 per month.

Unlike the national standard expenses, housing and utility expenses are not automatically granted. The expense allowed will be the lesser of (1) the taxpayer’s actual expenses and (2) the median expense of living in the county of residence. In other words, for a family of four in Contra Costa County, the housing expense will be the lesser of the median expense in the county, which is $2,434, or the actual expense incurred by the taxpayer. However, there is again room for argument here.

Household and utilities include rent or mortgage payments on the taxpayer’s principal residence, property taxes, property insurance, necessary maintenance and repair, parking, homeowner’s dues, gas and electricity, telephone, garbage, water and any other expense associated with home ownership or renting. In the case of shared living (taxpayer lives with fiancé), the revenue officer will usually allocate the expenses between a taxpayer and the person sharing the residence on the basis of actual contribution to the household, if by agreement. If there is no agreement, allocation will probably be proportional to income (if taxpayer earns $10,000 and fianceé earns $20,000, taxpayer gets one-third of the household and utilities expense).

There is room for argument where the housing cost can be tied to income or health and welfare issues. If employment is dependant upon living close to the job, higher costs can be justified. In the case of the elderly, cost of relocation can justify higher living expense.

The IRS asks that proof of car payment, lease, fuel, oil, insurance, parking and registration fees to be submitted with the Offer. These are requested for the non-business use of the car, assuming that business use will be netted out in the net income statement. As in the case of household and utilities, there is a cap on the amount of transportation expense. The cap has two components, namely the monthly ownership cost (lease or monthly loan payment) and operating costs. Operating costs are based on average transportation cost determined by metropolitan statistical area while ownership costs are determined nationwide. The cap on car payments for the first car for the San Francisco Bay Area is $471, while the cap on the second car is $332 per month. The balance of the monthly operating expenses (gas, oil, necessary maintenance, insurance, parking and tolls and registration) cap out at $401 for one car, and $484 for two cars. If the taxpayer has no car, the cap for public transportation is $325 per month.

The Healthcare expense category consists of (1) the monthly average of out-of-pocket expenditures (not reimbursed by insurance) for medical expenses, and (2) the cost of maintaining medical insurance, averaged over some period (such as six months). The form requires supporting data for the last three months and this is another area where there seems to be extreme scrutiny. A statement as to the reason for the expenses may be advantageous.

Revenue officers will generally look to the rate at which taxes are actually being paid currently (withholding for wage earners and estimated taxes for non-wage earners). Taxes should include federal and state withholding, SDI, FICA, and Medicare.

Court ordered payments and child support require the attachment of the court order and proof of payment (checks).

The IRS will accept Life Insurance payments, but only if it is for term insurance equal to 3 times the taxpayer’s average salary. Additional cost will have to be justified by statements.

Other expenses allowable generally fall into two categories. Any expenses incurred in the production of income, these would include excess gasoline expenditures for taxpayers living far from their job, bridge tolls, parking expense, union dues, home office expense where warranted and any other expense which, if not incurred, would adversely impact the taxpayer’s earning ability. In the case of self-employed individuals, these expenses will probably be netted out in the net income statement.

Other expenses can also include any item for which there is a compelling argument. Tithing has been accepted (and rejected) depending on the circumstances. The IRS does not consider sending a child to college more important then paying taxes.

Common sense will tell you that a family unit cannot spend more than it takes in. Therefore, the taxpayer will need to explain why expenses exceed income. If this is the result of subsidy by parents or the borrowing against credit cards, a statement to that effect will go a long way.

If the taxpayer finds that he is unable to pay the amount offered in full within ninety days of acceptance (recently changed to 5 months), taxpayer can opt to pay over a period of 24 months. However, the offer price will be higher because a 60 multiplier will be applied to the income realization instead of the 48 multiplier. This calculates out to an interest rate of up to 15%. Alternatively, the taxpayer can have the IRS determine how much the taxpayer can pay on a monthly basis and the taxpayer can agree to pay that amount monthly through the period that the statute of limitations runs. The statute of limitations for collection is ten years from the date of assessment and can be determined from an Internal Revenue Service transcript on which it is coded as CSED. These transcripts are available at any IRS office and the officer on duty will usually be glad to determine the collection statute for the taxpayer.

If there are special circumstances, the Internal Revenue Service can use an alternate set of rules that look to the fairness of accepting the offer. The IRS refers to the offer as based upon the need for effective tax administration. The IRS can accept an offer based upon the fact that collection of the tax would create an economic hardship on the taxpayer or that collection of the full tax would be detrimental to voluntary compliance.

Regulations released in July, 1999, give four examples of situations in which compromise is appropriate. These include the mother with a child having a long-term illness if liquidation of her assets would leave her without the ability to provide for her child, a retired person that would not have sufficient assets to provide for basic living expenses if his retirement plan were liquidated, and a disabled taxpayer with a home that has been specially equipped to accommodate his disability and where liquidation of the home would render him unable to get these facilities elsewhere. In each case, the fact pattern includes the fact that the taxpayer’s overall compliance history does not weigh against compromise.

The fourth example represents a complete reversal of IRS policy and results from some of the testimony given at the Congressional hearings in 1997. In the case of corporate Trust Fund taxes (withholdings of payroll 940/941 taxes), if there has been an embezzlement of funds of which a corporation was unaware and should not have known of, and if the company is profitable, but not profitable enough to pay the liability, the IRS will consider settlement.

Secondly, the IRS will compromise a liability where exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary compliance by taxpayers. This is a standard hard to comprehend. It appears that the intention is that if the overall story is compelling enough, taxpayers in general would lose faith in the system if the liability were not compromised.

The two examples start with a taxpayer incapacitated for several years and, when he becomes able to care for himself, finds he owes more than three times the original tax. The second example is that of a taxpayer that has been misled by IRS advice (in response to his E-mail, etc.), as often as this happens, most taxpayers do not obtain this advice in writing, therefore no action can be taken.

One thing is clear. The equitable offer is the far more uncertain road to travel, and may well take far longer than the well-defined offer in compromise based upon doubtful collectibility.

What is an Offer in Compromise

By | Offer in Compromise

What is an Offer in Compromise?

A taxpayer is well advised to seek a tax professional help because the Offer in Compromise OIC must be letter perfect or the IRS will reject it due to their heavy workload. Be sure the tax professional has verifiable third party references such as the BBB.

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed. Absent special circumstances, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement.

In most cases, the IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer’s ability to pay and includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.

Three Types of OICs

The IRS may accept an offer in compromise based on three grounds:

1. Doubt as to Collectibility – Doubt exists that the taxpayer could ever pay the full amount of tax liability owed within the remainder of the statutory period for collection.

Example: A taxpayer owes $20,000 for unpaid tax liabilities and agrees that the tax she owes is correct. The taxpayer’s monthly income does not meet her necessary living expenses. She does not own any real property and does not have the ability to fully pay the liability now or through monthly installment payments.

2. Doubt as to Liability – A legitimate doubt exists that the assessed tax liability is correct. Possible reasons to submit a doubt as to liability offer include: (1) the examiner made a mistake interpreting the law, (2) the examiner failed to consider the taxpayer’s evidence or (3) the taxpayer has new evidence.

Example: The taxpayer was vice president of a corporation from 2004-2005. In 2006, the corporation accrued unpaid payroll taxes and the taxpayer was assessed a trust fund recovery penalty as a responsible party of the corporation. The taxpayer was no longer a corporate officer and had resigned from the corporation on 12/31/2005. Since the taxpayer had resigned prior to the payroll taxes accruing and was not contacted prior to the assessment, there is legitimate doubt that the assessed tax liability is correct.

3. Effective Tax Administration – There is no doubt that the tax is correct and there is potential to collect the full amount of the tax owed, but an exceptional circumstance exists that would allow the IRS to consider an OIC. To be eligible for compromise on this basis, a taxpayer must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable.

Example: Mr. & Mrs. Taxpayer have assets sufficient to satisfy the tax liability and provide full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that Mr. and Mrs. Taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. There is no doubt that the tax is correct.

OIC Payment Options

Taxpayers may choose to pay their offer in compromise in one of three payment options:

1. Lump Sum Cash Offer – Payable in non-refundable installments, the offer amount must be paid in five or fewer installments upon written notice of acceptance. A non-refundable payment of 20 percent of the offer amount.

If the offer will be paid in 5 or fewer installments in 5 months or less, the offer amount must include the realizable value of assets plus the amount that could be collected over 12 or 24 months of payments or the time remaining on the statute, whichever is less.

If the offer will be paid in 5 or fewer installments in more than 5 months and within 24 months, the offer amount must include the realizable value of assets plus the amount that could be collected over 60 months of payments, or the time remaining on the statute, whichever is less.

If the offer will be paid in 5 or fewer installments in more than 24 months, the offer amount must include the realizable value of assets plus the amount that could be collected over the time remaining on the statute.

2. Short Term Periodic Payment Offer – Payable in non-refundable installments; the offer amount must be paid within 24 months of the date the IRS received the offer. Regular payments must be made during the offer investigation. This is in lieu of the 20% payment.

The offer amount must include the realizable value of assets plus the total amount the IRS could collect over 12 or 24 months of payments or the remainder of the statutory period for collection, whichever is less.

3. Deferred Periodic Payment Offer – Payable in non-refundable installments; the offer amount must be paid over the remaining statutory period for collecting the tax. Regular payments must be made during the investigation.

The offer amount must include the realizable value of assets plus the total amount the IRS could collect through monthly payments during the remaining life of the statutory period for collection.

The IRS is not bound by either the offer amount or the terms proposed by the taxpayer. The OIC investigator may negotiate a different offer amount and terms, when appropriate. The investigator may determine that the proposed offer amount is too low or the payment terms are too protracted to recommend acceptance. In this situation, the OIC investigator may advise the taxpayer as to what larger amount or different terms would likely be recommended for acceptance.

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