Offer in Compromise (OIC) 12/3/13
- Collection Options:
- extension up to 120 days to pay taxes in full
- currently not collectible (hardship) status – delay collection until financial condition improves
- installment payments
- expiration of Statute of limitations
- offer in compromise – settle for less than full payment
- See also: collection standards
- financial Information forms
- collection due process hearing right
- IRS Taxpayer Advocate Service (TAS)
- IRS Form 911 – Request for Taxpayer Advocate Service Assistance/ hardship relief
- Low Income Taxpayer Clinic (LITC)
- determining the correct tax
- audits / record keeping
- IRS correspondence audits
- notice of deficiency
- Tax Court
- what if you haven't filed returns
- trust fund recovery penalty
- what if you can't pay your taxes
- what if my spouse owes taxes but I don't
- can I really settle for pennies on the dollar ?
- innocent spouse relief
- injured spouse relief
- tax liens & levies
- subordination of lien
- can the IRS take my house
- abatement of penalties
- discharge of property from lien
- subordination of IRS lien, e.g., to refinancing
- bankruptcy doesn't remove a tax lien even after the tax is discharged
- trust fund recovery (responsible person) penalty
- private party (non-IRS) debt collectors
- tenancy by the entirety protections US v. Craft
An OIC is an agreement between the IRS and the taxpayer that settles a tax liability for less than full payment. Offers are authorized by Internal Revenue Code § 7122. Tax obligations that can be compromised include any civil or criminal case, including interest and penalties. The regulations provide some guidance, but much is left to IRS discretion.
The IRS will not investigate an offer for a tax year or tax period that has not been assessed.
An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential. OICs are subject to acceptance on legal requirements.
OIC: • News • announcements • cases on this page
The IRS has a new Form 656-B, Offer in Compromise Booklet, and Form 656, Offer in Compromise dated January 2014. The OIC user fee has increased from $150 to $186 in January 2014. The IRS will return applications submitted on older versions of the form with the old user fee. 3/10/14
Since 2003, the offer in compromise fee has been $150, $0 if an offer is based solely on doubt as to liability or is made by a low-income taxpayer. After January 1, 2014 the fee is $186. The IRS determined the full cost of an offer to compromise, including examination of the taxpayer's financial position, processing payments, and monitoring compliance, is $2,718. TD 9647, Reg. § 300.3. 12/3/13
IRS issued proposed regulations that, effective January 1, 2014, would increase the user fees charged to taxpayers who seek to pay their taxes either through an installment agreement or an offer in compromise (OIC). The IRS currently charges $105 for an installment agreement, reduced to $52 for a direct debt agreement, authorizing monthly payments, and $43 for low-income taxpayers. The charge is $45 to restructure or reinstate a defaulted agreement. The IRS determined that the full cost of an agreement is $282; $122 for a direct debt agreement; and $85 for a restructure or reinstatement. The IRS proposes to raise the installment agreement fee to $120, and the restructuring fee to $50. Other fees would not be increased. The IRS currently charges $150 [$186 1/2014] for processing an OIC. No fee is imposed on a low-income taxpayer. The IRS claimed that the full cost of an OIC is $2,718. The IRS proposes to raise the user fee for an OIC to $186. 9/5/13
IRS Fresh Start Program Helps Taxpayers Who Owe the IRS. Fresh Start expanded and streamlined the OIC program, and the IRS has more flexibility when analyzing a taxpayer’s ability to pay (it also made changes to the installment agreement and lien filing and withdrawal procedures). Use the Offer in Compromise Pre-Qualifier tool on IRS.gov to see if you may be eligible for an OIC. 4/17/13
IRS Announces More Flexible Offer-in-Compromise Terms IR-2012-53, May 21, 2012 5/24/12
- Revise the future income calculation to 1 year (from 4) for OIC paid in 5 or fewer months; and 2 years (from 5) of future income for OIC paid in 6-24 months. All OICs must be paid in full within 24 months after accepted.
- Taxpayers can make minimum payments on post-high school student loans guaranteed by the federal government . Proof of payment must be provided.
- Allowing monthly payments to state tax authorities in certain circumstances if the taxpayer can't pay them in full.
- Expanding the Standard Living Expense allowances incorporate average expenses for basic necessities for citizens in similar geographic areas, including to cover expenses such as credit card payments and bank fees and charges.
An offer is NOT "pennies on the dollar", or the tax without penalties or interest, as is frequently advertised. See IRS warning on certain promoters. You must offer to pay the IRS the full "reasonable collection potential" (RCP) as determined by the IRS (e.g., the "quick sale value" (QSV) in your assets and "future income" based on potential installment payments).
Under Reg. § 301.7122-1(b), the circumstances in which the IRS may accept less than the full liability include:
Doubt as to liability
There is a genuine dispute that a liability exists or its amount. There is no doubt as to liability where a final court decision has been rendered. This basis is not common because you typically have several opportunities to convince the IRS you do not owe the tax. If you could not convince the IRS before that the liability is wrong, generally something new must be available. The amount of the offer must reasonably reflect the amount the IRS expects to collect through litigation, including an evaluation of the hazards or litigation (in the IRS' sole discretion). There is a separate form 656-L. Doubt as to Liability offers can no longer be filed concurrently to request consideration under a different basis.
Doubt as to collectability
Based on the taxpayer's income and assets, the IRS is unlikely to collect the full amount. The offer amount is what could be collected through other means (e.g., enforced collection, e.g., garnishment and levy), taking into consideration a taxpayer's basic living requirements, but the determination is individual and fact specific; or
Efficient tax administration ("ETA")
There is no doubt as to liability or collectability, but it would be a hardship (e.g., illness or inability to restore financial assets) or otherwise inappropriate to require full payment, and accepting the offer would promote future compliance, or because enforcing the full liability in the circumstances may serve to undermine public confidence that the tax laws are being fairly administered. For an ETA offer, a taxpayer must submit: 1) A collection information statement with all attachments, 2) A written narrative explaining the special circumstances and 3) supporting documentation.
Necessary Expenses — The allowable payments to support you and your family’s health and welfare and/or the production of income. This expense does not apply to businesses. If facts and circumstances of your situation indicate that using the scheduled allowance of necessary expenses is inadequate, the IRS will allow an adequate means for providing basic living expenses. It may be difficult to convince the IRS additional amounts are necessary and you must provide documentation that using national and local expense standards are inadequate to provide for basic living expenses. See IRS collection standards.
Expenses Not Generally Allowed — (unless you can prove that they are necessary for: 1) health and welfare or 2) production of income.):
- tuition for private schools
- public or private college expenses
- charitable contributions
- voluntary retirement contributions
- payments on unsecured debts such as credit card bills
- cable television charges and
- other similar expenses
Current Value — The amount expected from the sale of an asset (e.g., willing buyer and seller under no compunction). Determined from realtors, used car dealers, publications, furniture dealers, or other experts on specific types of assets.
Realizable Value — QSV minus secured debt with priority over a filed IRS Tax Lien.
As a result of the Tax Increase Prevention and Reconciliation Act of 2005 (H.R. 4297, "TIPRA") , beginning July 17, 2006 a taxpayer must meet all of the following requirements:
- Taxpayer is not currently in bankruptcy
- $150 application fee, or a signed Form 656-A, "Income Certification" submitted.
- 20% payment with the lump sum offer, or a signed Form 656-A, "Income Certification" submitted.
- The 1st installment payment on a periodic payment offer, or a signed Form 656-A, "Income Certification" submitted.
A payment less than 20% on a lump sum offer is processable, but failure to submit the remaining balance on request will cause the IRS to return the offer and retain the $150 application fee.
If the full amount of the first installment payment (short term periodic, or deferred periodic offer) is not provided the the offer is not processable and the IRS will return the $150 application fee to the taxpayer.
If during investigation the initial offer amount is found to be insufficient, in most instances the taxpayer will be asked to increase the offer, and submit the corresponding 20% payment (lump sum cash offer), or the periodic payment (short term or deferred payment offer). Otherwise the IRS may reject the offer and credit taxpayer's account(s) with any payment(s) submitted with the original offer.
The IRS will deem an offer that is not withdrawn, returned, or rejected within 24 months after IRS receipt "accepted". If a liability included in the offer amounts is disputed in any judicial proceeding that time period is omitted from calculating the 24-month timeframe. It is unlikely that the IRS will "accept" an unacceptable offer by failing to act within 24 months.
Taxpayers must file all delinquent tax returns, and pay any required estimated tax payment for the current year. The IRS will notify taxpayers and provide 30 days to file delinquent returns or make the required estimated tax payments or the IRS will return the offer to the taxpayer.
Businesses with employees must have paid all required federal employment tax deposits for the current quarter. If not, the taxpayer will be provided with a reasonable amount of time to pay the deposits and on failing to do so the offer will be returned. In addition, the business will be expected to remain current on all filing and deposit requirements while the offer is being investigated.
If an offer is returned the $150 application fee along with all TIPRA payments previously paid will be retained by the IRS and applied to the taxpayer’s liability.
An offer in compromise is made by filing form 656 (IRS form in Adobe "pdf" format)) offering an amount of money to settle this tax liability. An offer is based on doubt as to collectability must be accompanied by an extensive financial information form (433-A for individuals, Form 433-A (IRS form in Adobe "pdf" format), and form 433-B for a business, including self-employed and ownership of closely held entities, From 433-B (IRS form in Adobe "pdf" format)). A substantial number of attachments documenting the financial information are required, e.g., 3 months bank statements, utility receipts, etc.
Jointly with another person and both of you agree to submit an offer, send only 1 Form 656, and 1 $150 application fee (or Form 656-A, if applicable) and 1 20% deposit of the amount offered or 1st initial payment.
Jointly with another person and both of you submit separate offers, send 2 Form 656, and 2 $150 application fees (or Form 656-A, if applicable) and 2 20% deposits or 1st initial payments.
By yourself (such as employment taxes), and other liabilities with another person (such as income taxes), but only you are submitting an offer, then list all tax liabilities on 1 Form 656 and submit 1 $150 application fee (or Form 656-A, if applicable) and 1 20% deposit or 1st initial payment).
By yourself (such as employment taxes), and other liabilities jointly with another person (such as income taxes), and both of you agree to submit an offer, you must submit 1 offer for the separate liability and a 2nd offer for the joint liability, with 2 $150 application fees (or Form 656-A, if applicable) and 2 20% deposits or 1st initial payments.
You must respond within the time frame given to you by IRS or your offer will be rejected, the IRS will keep your $150 application fee as well as any payments you made with your offer such as the 20% payment or your 1st installment.
Federal tax lien is NOT released
If a Notice of Federal tax lien was filed prior to filing Form 656, the lien is not released until the offer terms are satisfied, or until the liability is paid, whichever comes first. A Notice of Federal tax lien may be filed during the course of an offer investigation regardless of the type of offer being considered.
The IRS will keep any tax refund 1) received during the year the offer is accepted and 2) for the year the offer is accepted even if received in a subsequent year. Taxpayer may not designate an overpayment to be applied to estimated tax payments for the following year. This condition does not apply if the offer is based on Doubt as to Liability.
The IRS charges a $186 fee for offers submitted after January 1, 2014. The offer is rejected if the fee is not enclosed. The fee is not applied against the taxpayer's liability except for offers based on effective tax administration or doubt as to collectability with special circumstances. If the offer cannot be processed the fee is returned.The fee is not returned if the offer is rejected.
The fee is waived if the offer is submitted based on doubt as to liability or if the taxpayer's total monthly income is at or below the poverty level established under federal guidelines (250% of the 2006 HHS Poverty Guidelines). Form 656-A "Offer in Compromise Application Fee Instructions and Certification," certifying that taxpayer meets the poverty guidelines must be filed for a waiver of the fee.
A worksheet titled IRS OIC Monthly Low Income Guidelines Worksheet is designed to assist a taxpayer in determining eligibility for the low-income waiver in the Form 656 package.
Add for each additional person
It generally takes 6 to 12 months to process the offer. The IRS has reported that the percentage of offer cases resolved in less than 6 months was 38 percent in 2002 and 56 percent in 2003.
The IRS may not levy a taxpayer's property if an offer is pending (has been accepted for processing), or for 30 days after a rejection and while an appeal of the rejection is pending. The date of levy suspension begins when the IRS officially signs for and accepts the offer for processing.
Your offer amount must equal or exceed your "reasonable collection potential" amount and must exceed zero. The minimum offer amount based on doubt as to collectability is:
- the net realizable value in your assets (quick sale value that a taxpayer could reasonably expect from the sale of an asset if sold quickly, typically in 90 days or less), minus what the taxpayer owes to a secured creditor with priority over a filed Notice of Federal Tax Lien (credits cards are unsecured debt and do not count), PLUS
- the "future income" (not actual monthly payments) based on potential installment payments based on your income less necessary living expenses for 48 to 60 months, or the remainder of statutory period of collection if less (Actual installment payments are generally NOT part of the offer, which is typically "cash payment in full".)
"Special circumstances" may warrant a further downward adjustment.
"Income" in this context means all amounts (e.g., cash coming thorugh your hands, taxable or not, gifts, etc.) available each month for you to live on.
"Future income" is a substitute for the present value of the potential installment payments, e.g., the value of "cash in hand" or full payment today of payments otherwise to be made over time, in effect considering an interest component. Think of getting a loan from the bank. Normally, you want to borrow a set amount and want to know what your monthly payments will be to "amortize" or pay off the loan in equal monthly payments over a set period of time. Reverse that, and think of offering to pay $100 per month for 5 years or 60 months (a total of $6,000) and asking how much you can borrow. The bank does not loan you $6,000, and will only loan you, e.g., $4,800 today in exchange for your promise to make $100 monthly loan payments. The difference is interest. The present value depends on the interest factor used (which for the bank depends on collateral, your credit worthiness, etc.). The IRS values potential payments for 5 years, or the remainder of the statute of limitations on collections if less. Generally, you can multiply the potential monthly payment by 48 to determine present value for purposes of an offer (e.g., $100 monthly payments equal $4,800 on an offer) if the offer is paid within 5 months of the offer acceptance, and multiply by 60 if paid in more than 5 months and less than 24 months after acceptance of the offer.
Other relevant factors include your age, health, education, employment history, current employment and earnings, and potential for future increase in income.
IRS revises calculation 5/24/12
The IRS will now calculate a taxpayer’s reasonable collection potential looking only at 1 year of future income for offers paid in 5 or fewer months, down from 4 years, and 2 years of future income for offers paid in 6 to 24 months, down from 5 years. All offers must be fully paid within 24 months of the date the offer is accepted (Long deferred OICs apparenlty no longer available). IR-2012-53, May 21, 2012
[Congress is considering removing this requirement 6/6/09]
[President Obama’s 2011 budget proposes removing the nonrefundable 20% down payment with the initial OIC application. 2/4/10]
Effective July 16, 2006, the TIPRA requires:
- a non-refundable 20% of the offer deposit accompany submission of "lump-sum" offers (IRC section 7809(b) and Treasury Regulation 301.7122-1(h)), and
- the first installment accompany submission of periodic payment offers and pay additional installments while the IRS is evaluating the offer (IRC section 7122(c)(1)(B)).
A "periodic-payment" offer means any offer of payments made in 6 or more installments.
Only taxpayers qualifying for the (1) low-income exemption or (2) filing a doubt-as-to-liability offer do not have to pay the application fee, or the payments imposed by TIPRA section 509. IRS web site information on the revamped offer program 7/12/06 & 11/2/06
The Form 656 Offer in Compromise (Revision 2/2007) package contains a worksheet titled “IRS OIC Monthly Low Income Guidelines Worksheet” designed to assist taxpayers in determining whether they qualify for the income exception.
All offer payments (e.g., lump sum, short term, deferred periodic) are considered “payments on tax” and are not refundable deposits regardless of whether the IRS declares the offer not processable or later returns, rejects, withdraws, or terminates the offer as a result of its investigation. When this happens, the IRS will apply the payment(s) to the taxpayer’s outstanding tax liability.
Taxpayers must specify in writing when submitting their offers how to apply the payments to the tax, penalty and interest due. Otherwise, the IRS will apply the payments in the best interest of the government (IRC section 7122(c)(2)(A)).
Taxpayers may designate the application of the required TIPRA payments in writing when the offer is submitted and must clearly specify how the partial payments are to be applied to a particular tax period(s) and to specific liabilities (e.g. income taxes, employment taxes, trust fund portions of employment, excise tax, etc.). Taxpayers may not designate how the $150 application fee is applied. The application fee reduces the assessed tax or other amounts due.
TIPRA provides for 3 types of payment terms:
An offer in which the offer amount must be paid in 5 or fewer installments on written notice of acceptance. 20% of the total amount of the offer must be paid with the Form 656.
Installments paid in 5 months or less after acceptance
Installment payments paid in more than 5 months after acceptance
The taxpayer should offer the realizable value of his assets plus the total that could be collected over 60 months of payments (or the remainder of the statutory period of collection, whichever is less).
Taxpayer must submit the 1st payment with the offer and continue to make regular payments while the offer is pending. The offer amount must be paid within 24 months from the date the IRS receives Form 656.
The offer amount must reflect the taxpayer’s realizable value of assets plus the amount that could be collected over 60 months of payments (or the remainder of the statutory period of collection, whichever is less). Failure to make the regular payments causes the offer to be withdrawn.
The amount must be paid over the remaining statutory period of collection. As with the short term periodic payment offer, the taxpayer must submit the 1st payment along with Form 656, and must continue to make regular payments while the offer is pending. The offer amount must reflect the taxpayer’s realizable value on assets plus the amount that could be collected through monthly payments during the remaining life of the statutory period of collection. Failure to make the regular payments during the offer investigation will cause the offer to be withdrawn.
Form 656-PPV, Offer in Compromise Periodic Payment Voucher, is a removable form to be used by a taxpayer to remit the required short term or deferred periodic payments while the offer is under investigation.
NOTE: The address where you send your periodic payments is different from the address where you submit your offer form.
You should have a plan for where the funds for the offer will come from before submitting the offer (do not wait until the offer is accepted). Normally, if you could borrow from a bank you could pay your taxes, so funds for an offer are typically provided by a relative, etc. Part of the funds may come from borrowing home equity from a lender. It does not work well to save the funds for an offer because savings are an asset so the savings will increase the required offer amount.
If the IRS believes your current income in not at its full potential (e.g., you used to make more money than you do now and the IRS is concerned you will again make more money after they accept an offer), the IRS may require a "collateral agreement" to mitigate that risk, e.g., if your current income is $20,000, the IRS might demand 10% of income in excess of $28,000, 15% of income in excess of $35,000, etc. (these numbers are made up for an example and your schedule would depend on IRS discretion). Thus, the IRS shares any increase in income, but never more than the tax previously owed, including ongoing interest.
The IRS does not like collateral agreements and generally counter-offers to accept an increased offer amount without requiring a collateral agreement. It becomes an economic decision whether to accept the increased amount or lower amount with a collateral agreement.
- Do you think your income will increase sufficiently so that paying the increased offer amount is better than the collateral agreement ?
- Do you just want definite closure ?
- Have you have already offered as much as you can pay, and thus can not increase the offer ?
Another type of collateral agreement comes into play if more than 1 taxpayer is liable for the tax and not all of the liable taxpayers are participating in the offer, e.g., ex-spouses on joint income tax returns or other persons liable for trust fund recovery penalties. Only the taxpayer making the offer is relieved of liability. The IRS will never collect more than the full balance of tax owed from all persons liable.
Statute of Limitations for Assessment and Collection is Suspended
The statute of limitations for assessment and collection of a tax debt is suspended while an offer is "pending," or being reviewed. The OIC is pending on the date an authorized IRS employee determines the offer is ready for processing until the IRS accepts, rejects, returns or acknowledges withdrawal of the offer in writing, and, if a taxpayer requests an Appeals hearing for a rejected offer, until the Appeals office issues a determination in writing to accept or reject the offer.
A taxpayer who has an approved installment agreement payment plan with the IRS and is making payments under this plan may stop remitting the installment payments at the time that a short term or deferred periodic payment offer is filed. A taxpayer that submits a lump sum cash offer must continue to make the installment agreement payments until the offer is accepted. If it is not accepted, the installment agreement payments must continue.
In the last several years the IRS has begun including the value of "dissipated assets" in the amount required to be paid as part of an OIC. Examples include life insurance proceeds received, and refinancing of a mortgage, not paid over to the IRS at the time. This is true even if the event occurred many years prior to submitting the OIC, and the money may no longer be available for the taxpayer to pay with the offer. 3/28/07
Payment of the offer amount (plus amounts under a collateral agreement) totally and finally resolves the tax liability,
BUT, the offer is cancelled or void, the full liability plus interest (less any payments) is reinstated, and the IRS will attempt to collect the reinstated balance, IF you fail to:
During the next 5 years following acceptance, or until the offer is paid in full if longer, Taxpayers Must:
- timely file all returns and pay the tax shown, and
- pay quarterly estimated taxes, if required
the IRS first sends a notice that the offer is in default and will be terminated if the default is not cured within 30 days.
The law requires IRS to make certain information from accepted Offers in Compromise available for public inspection and review. These public inspection files are located in designated IRS Area Offices.
If the IRS rejects your it will notify you by mail and explain the reason for the rejection. The IRS will keep your $150 application fee and payments.
You have the right to appeal the rejection to the IRS Office of Appeals within 30 days from the date of the rejection letter. The letter will include detailed instructions on how to appeal the rejection.
The number of offers submitted dropped by 20% in the first 8 months of 2007, from 37,700 in FY 2006 to 30,300 in FY 2007. The number accepted dropped by 22%. [IRS National Taxpayer Advocate 2007 report to Congress] 7/26/07
# Nina E. Olson, National Taxpayer Advocate, 2/26/09 statement before the Subcommittee On Oversight Committee On Ways And Means U.S. House Of Representatives Hearing on tax compliance challenges facing financially struggling taxpayers 4/28/09
OIC figures for 2009 to date provided in an IRS telephone forum included: 43,989 submitted, 10% non-processible (down from 30%), 23% accepted, 25% rejected, 29% returned, average 6 month processing by central unit in Holtsville and average 9 months processing in the field for more complex situations. 7/14/09
^ Figures from taxpayer liason representative at Missouri Bar Tax Committee meeting 5/12/11
IRS Announces More Flexible Offer-in-Compromise Terms IR-2012-53, May 21, 2012 5/24/12
Changes announced include:
- The IRS will now calculate a taxpayer’s reasonable collection potential looking only at 1 year of future income for offers paid in 5 or fewer months, down from 4 years, and 2 years of future income for offers paid in 6 to 24 months, down from 5 years. All offers must be fully paid within 24 months of the date the offer is accepted (Long deferred OICs apparenlty no longer available).
- Taxpayers may repay their student loans.
- Taxpayers may pay state and local delinquent taxes.
- Allowable Living Expense allowance category and amounts are expanded, and national standard expenses can include credit card payments and bank fees and charges.
- Narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential.
- Equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.
- Guidance has also been clarified to allow payments for loans guaranteed by the federal government for the taxpayer's post-high school education. In addition, payments for delinquent state and local taxes may be allowed based on percentage basis of tax owed to the state and IRS.
IRS Can Reject Offer-In-Compromise Based On Assets “Dissipated” Through Day Trading 4/1/11
In Tucker v. Comm., Dkt. No. 3165-06L, TC Memo. 2011-67, 3/22/11, the Tax Court has found that the IRS can include dissipated assets in a taxpayer’s reasonable collection potential (RCP) when evaluating an offer-in-compromise (OIC), and money lost while day trading was considered dissipated. Not only was the investment itself highly speculative, but the taxpayer had no experience and compounded the risk by trading on margin. The Tax Court found that the IRS did not abuse its discretion when it rejected the taxpayer’s OIC because the taxpayer’s RCP exceeded his tax liability.
The IRS won the battle, and won the war, but did not receive any tax payments. The taxpayer’s offer would have paid over 90% of his tax liability. The offers rejection demonstrates the IRS’s tough approach to handling OICs.
The IRS is expanding a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers 3/3/11
IR-2011-20, Feb. 24, 2011
This streamlined OIC is being expanded to allow taxpayers with annual incomes up to $100,000 to participate. In addition, participants must have tax liability of less than $50,000, doubling the current limit of $25,000 or less.
OICs are subject to acceptance based on legal requirements. An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. Generally, 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. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.
The IRS announced more flexible evaluation procedures for taxpayers who are unemployed or underemployed 3/17/10
IRS personnel may use a taxpayer’s current lack of income or reduced income in the analysis of the taxpayer’s future ability to pay an OIC, effective March 10, 2010, for any OIC currently under consideration and OICs previously rejected that are in their appeal period or where the taxpayer has requested Appeals consideration. If a taxpayer is unemployed and is not expected to return to his or her previous occupation or level of earnings, IRS personnel are instructed to contact the taxpayer to discuss the expected future level of income, and should also allow anticipated increases in necessary living expenses and/or applicable taxes. If a taxpayer is long-term unemployed, the interim guidance instructs IRS personnel to use the taxpayer’s current income in the future income calculation. The same treatment applies to taxpayers who are long-term underemployed. The IRS did not remove the requirement that a taxpayer generally must include a nonrefundable 20% payment (in a lump sum offer) when submitting his or her offer. When submitting a periodic payment offer, the taxpayer must include the first proposed installment payment. The IRS also may be flexible for missed payments under an OIC or installment agreement where taxpayers have a record of compliance. IR-2010-29, SB/SE 05-0310-012.
Note that the IRS will require you to update your financial information when the offer specialist finally gets around to reviewing it, typically 6 to 12 months after the OIC is submitted. Consequently, your circumstances could change substantially.
The IRS Small Business/Self-Employed Division (SB/SE) released 3 interim optional guides recognizing how the current economic downturn impacts OICs:
- An additional review must be initiated before rejection if the difference between taxpayer's offer and IRS determined "reasonable collection potential" is solely attributable to a disagreement on real property equity.
- Taxpayers are not required to include a 20% payment or periodic payments to change an accepted offer. No specific form is required (e.g., Form 656), but the proposal must be in writing. IRS employees are to review updated financial information and supporting documents and negotiate based on taxpayer’s current financial situation, recognizing how quickly circumstances change in the current economy.
- Although IRS procedures require any OIC without Form 656-A, low income fee waiver, be returned as not processable, the OIC will be processed if the offer meets IRS Low Income Guidelines.
Revised forms 9/30/09
The IRS posted a simplified version of the OIC application form on its web site, splitting old Form 656 into 2 new forms: Form 656 (reduced to 4 pages), Offer in Compromise, and Form 656-B, Offer in Compromise Booklet.