Making Offers in Compromise to the IRS
An Offer In Compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer’s tax debt. The IRS has the authority to settle, or “compromise,” federal tax liabilities by accepting less than full payment under the following circumstances:
- Doubt as to Liability – Doubt exists that the assessed tax is correct.
- Doubt as to Collect-ability – Doubt exists that you could ever pay the full amount of tax owed.
- Effective Tax Administration – There is no doubt the tax is correct and no doubt the amount owed could be collected, but an exceptional circumstance exists. This could be an economic hardship or full payment would be unfair and inequitable.
The first step in determining eligibility for an OIC is to carefully analyze the taxpayer’s assets and liabilities as well as income and expenses. If the taxpayer qualifies for an Offer in Compromise the next step is for the taxpayer to sign a Power of Attorney (Form 2848) authorizing the IRS to speak to your legal representative. Practice before the IRS is limited to attorneys, certified public accountant and enrolled agents.
The next step in the process is to prepare and negotiate your Offer in Compromise with the IRS. The negotiations usually center around the value of assets, (that’s the amount the IRS believes they could collect from a quick sale) and the taxpayer’s monthly income and living expenses.
There is a $150.00 application fee payable to the U.S. Treasury for submission of an Offer in Compromise.
There are two types of offers in compromise, a lump sum offer, which is an offer of payments made in five or fewer installments and a periodic-payment offer, which is an offer of payments made in six or more installments.
- A taxpayer filing a lump-sum offer must pay 20 percent of the offer amount with the application.
- A taxpayer filing a periodic-payment offer must pay the first proposed installment payment with the application and pay additional installments while the IRS is evaluating the offer.
The IRS considers the 20 percent payment for a lump sum offer, and the installment payment on a periodic payment offer, as “payments on tax” and are not refundable deposits regardless of whether the offer is later returned, withdrawn, rejected or terminated by the IRS.
There are three payment plans that the IRS may agree to:
- Cash (paid in 90 days or less)
- Short-Term Deferred payment (more than 90 days, up to 24 months)
- Deferred Payment (payment terms over the remaining statutory period for collecting the tax)
During the time that the IRS is reviewing your offer, they will withhold collection activities:
- While they investigate and evaluate the offer.
- For 30 days after they reject an offer.
- While we appeal an offer rejection.