Offer In Compromise

Written By Attorney Michelle Wynn on 2/23/17
If you or your business owes the IRS more than you can reasonably repay during the time the IRS to collect your tax debt, the IRS may accept an Offer in Compromise to settle your tax liability. There are 3 types of Offers in Compromise currently available: Doubt as to Collectability ( IRS Form 656 ), Effective Tax Administration Offer or “ETA” offer, and Doubt as to Liability Offer or “DATL” ( IRS Form 656-L ).


Doubt as to Collectability Offers

Doubt as to collectability offer ( IRS Form 656 ) is the offer in compromise resolution option for tax debts that you hear the most about. You’ll often here scam artists referring to it as a “pennies on the dollar” settlement. It is one of the best options for resolving any tax debt with the lowest amount out of your pocket, but it is also the hardest to qualify for.

The IRS only has a limited amount of time to collect a tax debt. Typically that time is 10 years from the date the taxes were assessed (typically when a tax return is filed). There are certain things that can happen that can stop that clock from running or that add to this time. The date that the IRS can no longer collect the taxes is called the “CSED,” short for “Collection Statute Expiration Date.”  If the IRS does not collect the taxes due before the CSED runs, then it can’t collect the taxes from you… it couldn’t even take the money if you send in a payment after the liability expires, unless it calls you and verifies that you are absolutely certain you want to pay anyway.

When the IRS is faced with a situation of having a tax liability that will likely expire before it is ever fully collected, there is a benefit in accepting less than the full liability in order to settle the tax debt. This saves the IRS time and aggravation of trying to collect a debt someone can’t afford. On the flip side, if you win the lottery the day after the IRS accepts your Offer, the IRS is still bound by the terms of the Offer and as long as you do not default, the IRS can’t collect more than your offer amount.

Because the IRS won’t be getting paid in full and because once the IRS accepts an Offer in Compromise it is permanent (unless defaulted), the IRS will only grant an Offer if you qualify.

Making sure that your Offer in Compromise is as beneficial to you as possible while still proving it is something the IRS can and should accept is something that takes knowledge and experience. It sometimes requires knowing the IRS procedures better than the IRS employee reviewing the offer. And it takes the experience to know how to portray the information in a light the IRS can accept and how to fully document any special circumstances. You want an attorney who has been successfully reaching Offers with the IRS for years.

For Individuals:
In order to be eligible to have the IRS even look at your Offer in Compromise:
1. You must have filed all tax returns that you were required to file.
2. At least one of the tax debts you are attempting to settle must have been actually assessed.
(This is why the IRS suggests you wait until you receive the first bill for at least one tax debt.)
3.You must make any estimated tax payments you are required to make for the current tax year
(and, in some cases, the last tax year as well).

If you do not meet the 3 requirements above, the IRS will simply return your offer in compromise to you and not even consider it. Many Tax Resolution Companies sell the submission of this offer to clients without considering these three requirements. If a company offers this service to you without verifying the above three requirements have been met, there is a strong likelihood of rejection, further frustration, and wasted money.

If you meet all of these requirements, you can then submit an Offer in Compromise to the IRS to resolve your tax debt for a set amount. The Offer Application ( IRS Form 656 ) must be submitted with a Collection Information Statement (IRS Form 433-A (OIC)) with full supporting documentation and an application fee, if required. The IRS will then assign an Offer Examiner or Offer Specialist to review your Offer in Compromise. Typically, the Offer Examiner or Offer Specialist will ask for additional documentation or will engage in with discussion with you about challenges to the amounts of certain expenses. At the end of the process, ideally, you will reach an agreement with the IRS Offer Examiner or IRS Offer Specialist on an acceptable payment amount to settle your tax liability.

There are 2 types of Offer Payment Options available: Lump Sum Payment Option or a Periodic Payment Option.

For a Lump Sum Offer in Compromise, you need to pay 20% of your proposed Offer amount when you send in your Offer for consideration, unless you qualify under the Low Income Certification guidelines. This 20% payment will not be refunded if your Offer is rejected. You then need to include a plan to pay the remainder of the Offer amount within 5 months of the date your Offer is accepted.

For a Period Payment Offer in Compromise, you must make monthly payments for 6 to 12 months to pay the amount you are offering. These payments have to be made monthly while your Offer is being considered and will not be refunded if your Offer is rejected. Typically this payment option is higher than if you make a Lump Sum Offer in Compromise.

If you are not able to reach an agreement with the IRS on your Offer in Compromise, you can submit the matter to the IRS Appeals Office to attempt to reach an agreement on your proposed settlement amount.

If your Offer in Compromise is accepted you really want to avoid defaulting your Offer. You can default your Offer if you incur a new tax liability or fail to file a tax return within 5 years from the year your Offer is accepted. You can also default your Offer if you fail to make the payments that you agreed to in the Offer.

If you are eligible to submit an offer, or are willing to become eligible to submit an Offer in Compromise, you may want to consider having professional assistance to give your tax settlement offer the best chance of success and pay the lowest amount possible.





For Businesses:

In order to be eligible to have the IRS consider a Business Offer in Compromise:
1. The business must have filed all tax returns that it was required to file.
2. At least one of the tax debts the business is attempting to settle must have been actually assessed.
(This is why the IRS suggests you wait until you receive the first bill for at least one tax debt.)
3. The business must make any required tax deposits it is required to make during the quarter and continue making all required federal tax deposits (called FTDs) while the Offer is pending.

If the tax liability is for “trust fund” taxes, the IRS must make a determination of whether to assess some or all of the trust fund liability to the responsible individuals before it will consider an Offer in Compromise for the business liabilities.

If the business does not meet the 3 requirements above, the IRS will simply return the Offer in Compromise to you and not even consider it. Many Tax Resolution Companies sell the submission of this offer to clients without considering these three requirements. If a company offers this service to you without verifying the above three requirements have been met, there is a strong likelihood of rejection, further frustration, and wasted money.

If the business meets all of these requirements, it can then submit an Offer in Compromise to the IRS to resolve its business tax debt for a set amount. The Offer Application ( IRS Form 656 ) must be submitted with a Collection Information Statement (IRS Form 433-B (OIC)) with full supporting documentation and an application fee. The IRS will then assign an Offer Examiner or Offer Specialist to review the business’s Offer in Compromise. Typically, the Offer Examiner or Offer Specialist will ask for additional documentation or will engage in with discussion with you about challenges to the amounts of certain expenses. At the end of the process, ideally, you will reach an agreement with the IRS Offer Examiner or IRS Offer Specialist on an acceptable payment amount to settle the business tax liability.

One major hurdle that businesses often face in getting a business tax settlement Offer in Compromise is that the IRS must consider whether it is giving this business an unfair advantage by allowing it to pay only a portion of the taxes originally due, since other businesses had to pay all of their taxes originally. Having an experienced tax attorney on your side can help you by getting advice about whether the IRS is likely to accept the offer and, if there is a reasonable chance of success, then framing the issues that caused the tax liability to not be paid to give your business the best chance of having its Offer in Compromise accepted.

There are 2 types of Offer Payment Options available: Lump Sum Payment Option or a Periodic Payment Option.

For a Lump Sum Offer in Compromise, the business would need to pay 20% of its proposed Offer amount when it sends in the Offer for consideration. This 20% payment will not be refunded if the Offer is rejected. It will also need to include a plan to pay the remainder of the Offer amount within 5 months of the date the Offer is accepted.

For a Period Payment Offer in Compromise, the business must make monthly payments for 6 to 12 months to pay the amount it is offering. These payments have to be made monthly while the Offer is being considered and will not be refunded if the Offer is rejected. Typically this payment option is higher than if it a makes a Lump Sum Offer in Compromise.

If you are not able to reach an agreement with the IRS on your business’s Offer in Compromise, you can submit the matter to the IRS Appeals Office to attempt to reach an agreement on the proposed settlement amount.

If the business Offer in Compromise is accepted you really want to avoid defaulting the Offer. A business can default on its Offer in Compromise if it incurs a new tax liability or fails to file a required tax return within 5 years from the year the Offer is accepted. The business can also default its Offer if it fails to make the payments that it agreed to in the Offer.

If your business is eligible to submit an offer, or is able to become eligible to submit an Offer in Compromise, you may want to consider having professional assistance to give your business tax settlement offer the best chance of success and pay the lowest amount possible.




 
Effective Tax Administration Offers

An Effective Tax Administration Offer in Compromise (referred to as an “ETA” Offer) is much like a Doubt as to Collectibility Offer in Compromise. An Effective Tax Administration Offer in Compromise should be granted by the IRS where accepting the Offer will not undermine compliance with the tax laws by other people who learn of the Offer and where:

"Although the taxpayer has the ability to fully paid the liability, doing so would create an economic hardship; or
Regardless of the taxpayer's financial circumstances, exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary compliance by other taxpayers."

These forms of Offers are the rarest and have the highest likelihood of being rejected by the IRS. However, it is possible to have an Effective Tax Administration Offer accepted under the right circumstances.

An Effective Tax Administration Offer is most likely to succeed when you can provide both a compelling narrative of how the liability arose and/or why you are unable to pay the liability without suffering severe hardship AND can provide a numerical calculation demonstrating the economic hardship you would suffer or the unfairness of asking you to fully pay the tax liability.

This is a combination of skills allowing you to build a compelling case for your client, which is what lawyers are specifically trained to do. And an experienced tax attorney should have the accounting skills to also create and explain the numerical calculation to an IRS agent reviewing the Offer.
 



 
Doubt as to Liability Offers

Doubt as to Liability Offers (referred to by the IRS as “DATL” Offers)( IRS Form 656-L ) are more rare than Doubt as to Collectibility Offers. Doubt as to Liability Offers are submitted to the IRS when there is a genuine question as to whether the amount of tax that the IRS says is due is actually owed by the taxpayer. Typically these are situations where there is not a clear-cut issue of law or a clear-cut issue of facts.

When a Doubt as to Liability Offer in Compromise is submitted, it is essentially a request to open or re-open an audit examination. It is appropriate typically when the IRS has assessed additional taxes against you or your business and you dispute the amount of tax assessed but you had no meaningful ability to challenge the assessment originally (such as if you moved and did not receive notice of the assessment within your time to contest it). Sometimes it is better to submit a request for an Audit Reconsideration rather than a Doubt as to Liability Offer.

If you have already paid the amount of the tax liability and still wish to challenge the IRS assessment, you would want to submit a Claim for Refund and Request for Abatement instead. An experienced tax attorney who is accustomed to IRS audits and audit reconsideration requests should be able to advise you on which option would work best for your particular situation.  
 



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