IRS Offer in Compromise

What is an Offer in Compromise?  (IRS Guidelines Sept. 2010)

An agreement between the taxpayer and the IRS that settles the taxpayer’s tax debt for less than the full amount owed.

Objectives of the Offer in Compromise Program
*  Resolution in best interest of both the taxpayer and the government
*  Provide taxpayer a fresh start toward future compliance
*  Obtain what can be reasonably collected as early as possible and at 
    least cost
*  Revenue that may not be collectible through other means

Who qualifies for an Offer in Compromise?
Generally, taxpayers who are unable to full pay their liability in a lump sum or through a payment agreement qualify for an office in compromise.

Basis of Offer in Compromise
*  Doubt as to Collect-ability – doubt that the tax liability could be fully paid
   during the life of the statute
*  Effective Tax Administration – exceptional circumstance exists:  public
    policy/equity/economic hardship
*  Doubt as to Liability – doubt exists that the assessed tax is correct

Reasonable Collection Potential
*  Formula for a lump sum cash offer:
    *  Reasonable Collection Potential
    *  RCP = QVS + 48 times NET
*  Where:
    *  QVS = Quick Sale Valve
    *  NET = monthly income less allowable expenses

Collection Financial Standards
*  National Standards:  Food, Clothing and Other Items
*  National Standards:  Out-of-Pocket Health Care Expenses
*  Local Standards:  Housing and Utilities
*  Local Standards:  Transportation

Offer in Compromise Payment Terms
*  Lump Sum Cash Offer
*  Short Term Periodic Payment Offer
*  Deferred Periodic Payment Offer

Lump Sum Cash Offer
*  Payable in five or fewer installments upon written notice of acceptance
*  Offer must be accompanied by 20% of the amount being offered and
    the $150 application fee of a completed Form 656-A
*  20% payment is not refundable, regardless of the outcome of the OIC

Determining the Lump Sum Offer Amount
*  5 or fewer installments in 5 months or less
 -Realizable value of assets + amount that could be collected over
            48 months (or time remaining on statute, whichever is less)
*  5 or fewer installments in more than 5 months but within 24 months:
   -Realizable value of assets + amount that could be collected over
            60 months of payments (or time remaining on statute, whichever is
            less)
*  5 or fewer installments in more than 24 months:
 -Realizable value of assets + amount that could be collected over
    the time remaining on the statute
 
Short Term Periodic Payment Offer
*  The offer amount must be paid within 24 months of the date the IRS
    received the offer
*  The first installment and the $150 application fee or a completed Form
   656-A are due upon filing
*  Regular installments must continue to be made during the offer
    investigation
*  Payments are non-refundable regardless of the outcome of the offer

Offer in Compromise Processing

*  Offer must be filed with Central Offer in Compromise Site:  Memphis or Holtsville
*  COIC site is determined by the taxpayer’s state of residence
    Exception:  DATL (Doubt as to Liability) offers must be filed with Holtsville
*  COIC makes all process-ability determinations

Application issues : The tax must:

1. Not be a debtor in open bankruptcy

2. Submit 150 application fee and form 656-A

3. Submit 20% of payment if filing a Lump Sum Cash offer, or the first installment payment if filing a Short Term.

Offer will be returned if 1. Taxpayer has not filed all tax returns. 2. Taxpayer has not made est pymts. 3. Taxpayer did not provide all info.

In FY 2009,  The IRS accepted 24% of the offers.  Case cycle was 6 months for 89% of taxpayers.