MEMORANDUM ON OFFER IN COMPROMISE
An Offer in Compromise is the most straight forward and effective method of reducing your tax debt. If you qualify, you will only be required to pay a small fraction of what you owe to settle your tax debt for good. The IRS takes about six to nine months to process and accept an Offer in Compromise. There are three types of an Offer in Compromise: (1) Doubt as to Liability, (2) Doubt as to Collectibility and (3) Effective Tax Administration. They are all governed by IRC §7122(c). IRS Form 656 must be completed to apply for an Offer to Compromise. Only about 25% of the OIC's submitted were accepted by the IRS.
A. Qualifying for an Offer In Compromise
There are three types of Offers in Compromise.
1. Doubt as to Liability
- Debtor believes he/she can show some reasons for doubt that the tax amount you owe is incorrect.
- Debtor must fill out Form 656-L.
- This is very difficult to prove.
2. Doubt as to Collectibility
- There is some doubt as to whether the IRS can collect the tax bill from you- now or in the foreseeable future.
- You can show that there is almost no chance the IRS will get their full money.
3. Exceptional Circumstances
- Payment of your full tax bill would cause an "economic hardship" or would be "unfair" or "inequitable."
B. Process of Filing
A client interested in submitting an OIC must first complete IRS Form 656, Offer in Compromise. There is a $150 application fee. If you plan on taking longer than 5 months to pay, you must send in a minimum of 20% of the offer with your application. If you take longer than five months to pay, you must pay the first installment with your application. You must also make the proposed payments while the offer is pending. All these payments are non-refundable but goes towards the unpaid tax liability.
Next, you must submit a Collection Information Statement or Form 433-A. Information about your spouse may be required. The IRS scrutinizes this form very strictly.
C. After Submitting Forms (The Downsides to OIC's)
After submitting forms 656 and 433-A, the IRS requires a lot of documents: pay stubs, bank records, vehicle registrations, etc. box-loads of documents are usually submitted. Also if your OIC is rejected, the disclosures you made about your assets allows the IRS to accelerate their collections efforts against you. Interest also continues to accrue during the Offer in Compromise Process.
D. How much to Offer
The IRS says 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. Consider making an offer even if you don't have this full amount, especially if you have special circumstances such as being over 60, recovering from a disease or a tough time. Include any special information in a letter attached to Form 433-A.
E. Proceeding if your Offer is Rejected
Resubmit your Offer or Appeal. The IRS will tell you what amount is acceptable.