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Offer in Compromise

What is an Offer in Compromise?


Offer in CompromiseAn offer in compromise allows a taxpayer to settle theirpast-due back tax liabilities for less than the full amount owed. It is a great option for taxpayers suffering from financial hardship. The factors considered by the IRSinclude the following:

  1. The taxpayer’s ability to pay;
  2. The taxpayer’s income;
  3. The taxpayer’s expenses; and
  4. The taxpayer’s asset equity.

Generally, the IRS will approve an offer in compromise when the amount offered represents the most the government can expect to collect within a reasonable period of time (usually 5 years). The Offer in Compromise program is not for everyone and is greatly over-promoted by non-attorney tax firms. If a taxpayer seeks an offer in compromise, they should be sure to check that attorney’s qualifications.

How does the IRS determine if a taxpayer is eligible to make an offer?

Before the IRS can consider a taxpayer’s offer, the taxpayer must be “current” with all filing and payment requirements. The taxpayeris not eligible if there is an open bankruptcy proceeding.  The IRS will ask a taxpayer seeking to make an offer in compromise to provide current financial information to determine the taxpayer’s eligibility to make such an offer.

What are the payment options for an accepted Offer In Compromise?

Option 1:The taxpayer may submit the initial payment of 20% of the total offer amount with the offer in compromise application and then pay the remaining balance in five or fewer payments.

Option 2:The taxpayer may submit an initial payment of 20% with their application and pay the remaining balance over 2 years.

Option 3:  While option 1 and option 2 are the most common, more options are available depending on the taxpayers personal circumstances.  As such, a tax attorney should be consulted.

If the taxpayer meets Low Income Certification guidelines, the taxpayer does not need to send the application fee or the initial payment. The taxpayer will not need to make monthly installments during the evaluation of their offer.

What happens after the taxpayer submits an Offer?

While a taxpayer’s offer is being evaluated:

  1. The taxpayer’s non-refundable payments and fees will be applied to the tax liability;
  2. A Notice of Federal Tax Lien may be filed;
  3. Other collection activities should be suspended;
  4. The legal assessment and collection period will be extended;
  5. Existing installment agreements for the back taxes are suspended; and
  6. The Offer is automatically accepted if the IRS does not make a determination within two years of the IRS receipt date.

What happens if the offer is accepted?

  1. The taxpayer must meet all the Offer Terms listed in Section 8 of Form 656, including filing all required tax returns and making all payments;
  2. Any refunds due within the calendar year in which the taxpayer’s offer is accepted will be applied to the tax debt;

Tax liens are not released until the offer terms have been fully paid and completed.

What happens if the offer is rejected?

A rejected Offer in Compromise may be appealed within 30 days of the date on the rejection notice

Featured Articles on Offer in Compromise

“Offer in Compromise”

INTRODUCTION

Sometimes, for a variety of reasons, taxpayers find themselves in a situation in which they are unable to pay for their tax obligations. This results in back taxes, which must be taken care of immediately to prevent any penalties. An offer in compromise is one way to get out of the hole that taxpayers find themselves in when they cannot pay their back taxes. An offer in compromise considers the situation of the taxpayer and, under certain circumstances, allows for the “forgiveness of tax debt”.

Not everyone qualifies for an offer in compromise. However, if an individual is in a tough financial situation due to inevitable life events, they may be qualified to submit an offer in compromise. Certain conditions must be met to qualify for an offer in compromise. The IRS completely and carefully evaluates the financial status of a taxpayer before accepting an offer in compromise. Therefore, before submitting an offer in compromise, an individual should make sure they completely qualify.

Once qualification is determined, the offer in compromise itself must be submitted. This is a process that must be completed with honesty and full disclosure with regards to financial status. An offer in compromise could technically be completed without any outside help, but the individual may be missing out on critical details that could benefit their situation even more. Therefore, to ensure the success of an offer in compromise, one must seek legal help with someone who has acquired expertise in the matter.

Once an offer in compromise has been accepted or denied, the taxpayer has certain options to pay the balance that the IRS deems appropriate. Each option has both its advantages and disadvantages. However, the important part is the fact that the IRS has reduced the final amount that must be paid. Therefore, an offer in compromise is exceptionally important and potentially helpful to those in financial need.

ELIGIBILITY

Deciding whether to submit an offer in compromise is one that must be considered carefully. For those who are undoubtedly suffering an unreasonable amount of financial hardship, these qualifications to submit an offer in compromise should not be of any concern. However, for those who are unsure whether the severity of their hardship would garner any attention from the government, it is critical to consider each point of qualification before submitting an offer in compromise.

The qualifications of submitting an offer in compromise can be summarized by answering the following questions:

  1. How much money can the taxpayer pay and how much money should be “forgiven” by the offer in compromise?
  2. Does the taxpayer’s income history support an offer in compromise?
  3. Do the taxpayer’s recent expenses reflect the potential information that will be provided by the offer in compromise?
  4. What is the taxpayer’s asset equity, and how can that be used to take care of anything that will be mentioned by the offer in compromise?

Once the answers to these questions have been determined, an individual can decide whether to submit an offer in compromise.

How much should be “forgiven” by the offer in compromise?

The word “forgiven” must be used lightly, as an offer in compromise doesn’t exactly “forgive” taxes. Instead, it reevaluates the taxpayer and the amount of taxes that they have been requested to pay. If something such as a medical emergency has occurred, it might change the amount of taxes that the individual is expected to pay. An offer in compromise accounts for such emergencies and reports them to the government so that they may evaluate how much is needed. In other words, an offer in compromise really functions as an alert to the government regarding a large unexpected expense.

An individual should not expect to be able to use an offer in compromise merely because they wish to pay fewer taxes. An offer in compromise does not function as something to compensate for a year’s worth of poor decisions. Instead, an offer in compromise takes the exceptional circumstances and notifies the IRS so that the individual can be treated fairly. In many cases, an offer in compromise accounts for events that happened between the end of the fiscal year and the due date for taxes. In other words, individuals who had the finances prepared for April 15 but had an unexpected accident occur in February may be forced to delve into the money intended for paying taxes. Situations such as this are what an offer in compromise is intended to take care of.

The amount that is taken care of by the offer in compromise depends on the severity of the emergency. The IRS will take a look at the individual submitting the offer in compromise, consider the impact of the emergency, and then determine what amount of taxes, if any, the individual should pay in question. A significant emergency may not eliminate all taxes expected if, for example, the taxpayer has a certain amount of money leftover to spend. In essence, an offer in compromise merely makes things fair for those with unexpected expenses. The amount approved is the amount that the IRS feels is fair for everyone.

The Taxpayer’s Income

Income is an important factor in the consideration of an offer in compromise. Although not always the case, the IRS tends to favor lower-income individuals who submit an offer in compromise because it they are usually the ones who find themselves in situations in which they cannot legitimately pay for their previous tax expenses. When making a decision about an offer in compromise, the IRS will typically ask for documentation supporting the income that the individual claims. Individuals must be completely transparent when submitting an offer in compromise because if they are not entirely honest, they risk severe penalties.

For those who are definitely in the low-income category, the income factor should not be very concerning with regards to whether the offer in compromise will be accepted. For these individuals, the “expenses” category is where most of the attention should be focused. For an offer in compromise to work, these expenses must exceed whatever amount that the IRS deems to be appropriate. However, once again, income should not be a concern for lower income individuals submitting an offer in compromise.

For those who are in the middle-income category, it will be much more difficult, though not impossible, to have an offer in compromise approved. It will take much more than just a small medical injury or minor emergency, especially if the individual’s income indicates that they could pay for it themselves. An offer in compromise may still be submitted, but the income of an individual may unfortunately inhibit them from convincing the IRS that the “need” is there. One must remember that an offer in compromise completely removes the requirement to pay certain back taxes, so the IRS is very careful in approving them.

If one is not sure whether they would be considered for an offer in compromise, or if they believe that they need assistance in convincing the IRS that their offer in compromise represents a legitimate need, it is absolutely necessary for them to contact a tax attorney. A properly qualified tax lawyer has typically dealt with several situations in which an offer in compromise was close to rejection. Tax lawyers can carefully consider an individual’s income and advise them what elements need to be added for the offer in compromise to be successful. If the offer in compromise is indeed successful, an individual will be much less burdened by back taxes.

The Taxpayer’s Expenses

Another element that is considered for an offer in compromise is the taxpayer’s expenses. The IRS will determine whether the taxpayer’s spending patterns support a “need” for back taxes to be reduced. If such a need exists, then an offer in compromise is likely to be approved. If the IRS determines that, based on the taxpayer’s expenses, such a need does not exist, then the offer in compromise will probably not be approved. The expenses of an individual are especially helpful to the IRS as they determine whether or not the taxpayer has been spending where they should be saving.

The taxpayer will likely be asked to submit proof of expenses, such as bank statements, receipts, and other items. When submitting an offer in compromise, the taxpayer should expect to be able to recover as many of these items as they possibly can. If they cannot submit many of these items, the offer in compromise loses some if its legitimacy. Many individuals try to present cases in which they are not qualified for an offer in compromise. In these cases, they illegally attempt to mask the proof of their expenses by claiming that such proof does not exist. This is why it is important to submit evidence of expenses so that an individual’s offer in compromise is clearly not a sham.

Those who have been spending on certain extravagant items rather than mere necessities will have a harder time with submitting their offer in compromise. It is not impossible, but still difficult to do without the presence of a tax lawyer. A tax lawyer can look through an individual’s expenses to determine how likely it is for their offer in compromise to be approved.

Other Eligibility Requirements

One other important item that is considered before an offer in compromise is approved is whether the individual is up to date with all of the filing requirements. If not, the taxpayer must go back and fill out every form which they have not completed. An offer in compromise cannot be submitted until this is completed. Once all filing requirements have been fulfilled, the taxpayer is eligible to submit an offer in compromise.

THE OFFER IN COMPROMISE FORM

Now that this article has reviewed basic qualifications for an offer in compromise, it will now turn its attention to the actual IRS form for submitting it. The form for submitting an offer in compromise is called Form 656. This must be filled out completely before an offer in compromise can even be considered. At the beginning, it features some basic personal questions such as name and address. As the form continues, however, it asks important questions regarding qualifications for an offer in compromise.

If one believes that they are qualified for an offer in compromise based on the qualifications listed above, they should not have many issues filling out the rest of the form. The first set of more complicated questions deal with taxpaying history. These should be easy to fill out after recovering documentation regarding the taxes paid in the previous year.

At the end of the first page of the form, the IRS asks the reason for submitting the offer in compromise. Two possible options are given: Doubt as to Collectability and Exceptional Circumstances. It is best to communicate with a tax lawyer regarding which option is the most appropriate, but in some cases this can be done after considering what each option entails.

Doubt as to Collectability

For an offer in compromise, this option does not really say that much or have much leverage. It basically states that the individual does not think that the IRS will be able to collect their taxes from the individual. Without an adequate amount of rationale, the IRS is unlikely to consider an offer in compromise based solely on a doubt as to collectability. There must be a reason for doubt for collectability if one truly wishes their offer in compromise to be approved. The individual filing an offer in compromise should not get their hopes up if this option is selected with inadequate explanation.

Exceptional Circumstances

An offer in compromise operates best when there are exceptional circumstances that must be considered. On Form 656, the IRS provides a brief summary of what is required for an Explanation of Exceptional Circumstances. This is really the heart of the offer in compromise. If an explanation can adequately explain the dismissal of taxes, the IRS is much more likely to accept an offer in compromise.

The summary of the directions for the explanation of circumstances regarding the submission of an offer in compromise are paraphrased as follows. The IRS knows that some things in life happen unexpectedly (serious illness is specifically mentioned). The IRS (as heartless as it may normally seem) recognizes that one must provide for themselves and their family. If one has found themself in such an unexpected event, they may submit an offer in compromise provided they have enough documentation to support their claims. The form then asks for the explanation and requests the taxpayer to attach supporting documentation to the offer in compromise.

This is where a tax lawyer can definitely prove to be important. Since this section is the main part of the offer in compromise – a section which must be both persuasive and reasonable – it is best to have someone with expertise in the legal system. They know how to properly phrase this part of the offer in compromise in a manner that will more than likely garner attention from the IRS. If this explanation is properly written, the IRS will definitely accept the offer in compromise. A tax lawyer is also useful in knowing what kinds of documents the IRS wants to see. Once everything has been properly filled out, and all documentation has been submitted, the offer in compromise goes into review by the IRS.

Low Income Certification

As was discussed earlier, being in the low income bracket is advantageous when submitting an offer in compromise. However, the IRS has very specific definitions of what qualifies as “low income” for an offer in compromise. On the form, there is a table determining whether an individual is truly low income based on both family size as well as whether they live in the contiguous states or Hawaii or Alaska. If an individual earns less than the listed amount for the offer in compromise, then they qualify as low income. If not, then they cannot say that they are in the low income category. When submitting the offer in compromise, the entire household monthly income is considered, rather than that of just one individual.

Obviously the most important part of the offer in compromise is the final amount. This must be submitted along with the application and is subject to approval or rejection by the IRS. If the amount is too high, the IRS may reject it after all of the above factors are considered. Therefore, a reasonable estimation is necessary for those submitting the offer in compromise. If rejected, it can later be appealed, but it is best to submit the offer in compromise with a proposed amount that will reach immediate approval.

Options

While submitting an offer in compromise, one must determine the way in which they will pay for the back taxes. Even if the IRS approves the offer in compromise, the individual is still responsible for a portion of their taxes. Therefore, a taxpayer must consider the best option of payment when submitting an offer in compromise. As this is part of the form, this must be completed before the offer in compromise is submitted.

It is best to consult a tax lawyer who can evaluate the income and expenses of an individual and determine the best option for those who need further opinions. Tax lawyers have experience with people who have submitted an offer in compromise and had to deal with paying for some (but not all) of their back taxes.  If the two normal options are insufficient, tax lawyers are experts at improvising other kinds of payment plans for an accepted offer in compromise.

There are two normal options for those who submit an offer in compromise. In both cases, the taxpayer must submit a fifth  (twenty percent) of what they are asking for with the offer in compromise.  This must be submitted as a check. Then the taxpayer chooses between two options. The first one is best for people who prefer longer-term payments. The second is for those who want to pay for the remaining back taxes as soon as they possibly can.

Option 1: Specific Payments (Lump Sum Cash)

This option for an offer in compromise best suits those who cannot pay a consistent amount. It gives the option to pay up to five different payments on dates that are specified by the individual submitting the offer in compromise. The individual must first submit 20% of their proposed total payment with the application for an offer in compromise (form 656). Then, the individual must choose which dates they can pay, and how much they can pay on each of these dates. Note that it is not required to have exactly five payments. If an individual believes they can pay all in one day, then only one day must be listed on the offer of compromise. However, if the individual needs a longer time to pay, five payments may be the best option. The amount decided to be paid by the offer in compromise must be taken care of within two years. In other words, the fifth payment must not be on a date that is later than two years after the application. As this is a critical section of the offer in compromise, this option must be carefully considered. It is not meant for everyone.

Option 2:  Periodic Payments

There is a second option to pay the amount necessitated by an offer in compromise, but it must be done with much more consistency. This option requires a twenty percent payment with the submission of the application of the offer in compromise. After this, the individual is expected to pay equal amounts every single month. Again, this option of the offer in compromise requires a significant amount of consistency on behalf of the submitter. The payments are equal amounts each month. The payments occur on the same day of each month. For those who are reasonably able to anticipate their future expenses with consistency, this is the best option. Individuals can choose how many months they want this to continue, but it may not exceed twenty-three months.

The difference between options

These options are very distinct and serve different needs for those submitting an offer in compromise. Option 1 best suits individuals who do not know much about their future income other than what they will receive on specific dates. It gives a lot more freedom with regards to how much is paid and when. However, individuals must be very careful when selecting their payment dates. Individuals must be absolutely certain that they will have the amount of money requested by then.

These options are very distinct and serve different needs for those submitting an offer in compromise. Option 1 best suits individuals who do not know much about their future income other than what they will receive on specific dates. It gives a lot more freedom with regards to how much is paid and when. However, individuals must be very careful when selecting their payment dates. Individuals must be absolutely certain that they will have the amount of money requested by then.

Option 2 best suits those who are paid consistency, in spite of anything that has been offset by the “extenuating circumstances”. However, there is not much freedom as to paying more money one month than in another month, and therefore individuals must decide whether option 1 is better.

Typically, both options are set up so that the number of payments does not exceed five. If an individual submits an offer in compromise and wants to have more than five payments, they must may be able to make an exception as long as it is reasonable. This is where a tax lawyer comes in handy. For those who need a longer period of time to pay, a tax lawyer can highlight where exceptions to the “five payment” rule are allowed for an offer in compromise.

AFTER SUBMITTING AN OFFER IN COMPROMISE

Non-refundable payments

Regardless of whether or not the offer in compromise is accepted, all fees and payments are non-refundable. This includes submission fees as well as the 20% payment submitted with the offer in compromise. In both cases, the payment will go toward the tax liability. A taxpayer should not expected to temporarily receive their submitted payment as a “refund” after their offer in compromise has been rejected. Once submitted, that money is gone.

Tax Liens

While an offer in compromise is being processed, the IRS may still file for a tax lien. A tax lien basically gives the government title to an individual’s property. The taxpayer still gets to keep the property, but once a tax lien has been established, it is as though they are “renting” these items from the government. Conditions for a tax lien may be different while the offer in compromise is being processed, but it is important for all taxpayers to know that a Notice of Federal Tax Lien may still be filed while the offer in compromise is being processed. Consultation with a competent tax lawyer is a necessity if one is concerned that they will get a tax lien, as this is something that has the potential for making the situation worse than it already is.

Other Collection Activities

Fortunately, some collection activities, such as phone calls and notifications by mail, should halt during the submission of an offer in compromise. This is due to the fact that the individual has taken action to try and pay for the back taxes. There is no point of bothering a taxpayer with collection notices if an offer in compromise has been submitted. Things may change soon, however, if the offer in compromise is rejected. However, during the time of the offer in compromise is in process, no collection activity should take place.

Extensions

During the time it takes an offer in compromise to be approved or rejected, extensions to normal taxpaying activities are given. Legal assessment and collection periods are extended. As was stated before, an offer in compromise tells the IRS that the individual is making an effort to pay a portion of their taxes. Since the IRS is getting some kind of payment, albeit small, they are willing to give extensions for the time being.

Previous Installment Agreements

The taxpayer may have had arrangements to pay their taxes in installments. Once an offer in compromise has been submitted, these existing agreements are temporarily suspended. If the offer in compromise is approved, then the installment payments submitted take priority over previous ones. If the offer is rejected, however, then the installment payments prior to the offer in compromise take priority.

Approval Time

Typically, the IRS tries to look at a submitted offer in compromise quickly, but in rare circumstances, this is not possible. It is not a common event, but if the offer in compromise has not been approved or rejected for two years, then it is automatically accepted. Note that the two year period does not forgive all of the taxes. It only takes care of the ones that are reflected by the offer in compromise. On top of that, the taxpayer must follow their new payment plan to pay the requested amount of back taxes.

Acceptance of the offer in compromise

If the offer in compromise is accepted, then the taxpayer should be grateful, as this is not a normal occurrence. In order for an offer in compromise to reach approval by the IRS, the government must believe that the circumstances behind the inability to pay taxes are so severe that it makes things unfair for the taxpayer. However, there are still conditions that must be followed after the offer in compromise is accepted.

For one thing, the taxpayer must be exceptionally careful to follow the new schedule for payments. Since the IRS has extended a certain amount of grace regarding back taxes, their expectations for payment are going to be much higher. After all, a portion of taxes has been taken care of. After an offer in compromise has been accepted, the individual involved does not have to worry about some back taxes ever again! Therefore, they must be prompt in paying what is required.

If it should occur during the payment period that the taxpayer is unable to make one of the payments, it is imperative that they consult a tax lawyer to explore further options. A tax lawyer may be able to intervene in such a way that the an individual alone could not. Regardless of the circumstances, when submitting on offer in compromise, it is to the individual’s advantage to have a lawyer to consistently advise them along the way.

Rejection of an Offer in Compromise

The IRS does follow strict rules and guidelines regarding whether or not an offer in compromise will be accepted. Sometimes, even harsh medical emergencies may not necessitate a favorable response from the IRS. If the IRS determines that the individual is not qualified for an offer in compromise, then they will promptly reject it. Individuals will be notified shortly after their offer in compromise has been rejected.

If the offer in compromise is rejected, there are still certain ways to try to appeal the rejection. The IRS gives individuals thirty days to appeal a rejected offer in compromise. Under such circumstances, individuals need to gather as much evidence of their needs as possible to further persuade the IRS to take sides with them.

Unfortunately, an offer in compromise may not be the best option for everyone. Some individuals find themselves in situations in which an offer in compromise would not sufficiently cover their needed expenses. Other taxpayers simply do not qualify to have their taxes taken care of in this way. For those who have had a rejected offer in compromise but still need to pay for back taxes, there are many other options such as the installment plans discussed earlier. Of course, the best way to take care of back taxes is through the consultation of an experienced tax lawyer. With the proper amount of knowledge and experience, a tax lawyer can properly direct an individual to options other than submitting an offer in compromise.

CONCLUSION/SUMMARY

An offer in compromise is a good option whenever someone finds themselves unable to pay for taxes due to a sudden unexpected emergency. The IRS carefully considers each offer in compromise to come to a decision that is fair both to the taxpayer and citizens as a whole. An offer in compromise should only really be considered if there is need. In other words, an offer in compromise only works if there is a legitimate concern that should be brought to the IRS. Otherwise, the individual submitting the offer in compromise risks wasting both their own time and that of the IRS.

An individual must consider their eligibility for an offer in compromise. This includes their cash flow in their daily activities. The IRS will consider income and past expenses as factors in the approval or rejection of an offer in compromise. Generally, lower-income individuals are favored more than higher-income individuals due to the fact that such individuals truly need the benefits of an offer in compromise.

The offer in compromise form must be fully completed before it is submitted. It is best to consult a tax lawyer when making the statement regarding the need for the offer in compromise. A tax lawyer knows how to properly phrase the situation so that the maximum benefit can be employed.

Part of this form requires the individual to choose between two payment options. The first option allows an individual to pay very specific amounts on very specific dates. The second option requires a more consistent payment system that occurs on a certain day each month. Regardless of the option chose, 20% of the amount decided to be paid must be submitted with the application. This application is known as “Form 656”.

After an offer in compromise has been submitted, several things happen. Collectors stop with their typical demands as they wait for the result of the offer in compromise. Previous installment payment agreements are suspended in favor of the new ones.  Extensions may be granted for fees and other items that had previously been established. Unfortunately, tax liens may still be followed, which gives the government ownership over certain kinds of property. A tax lawyer must be contacted for further information.

It should not take too long for the IRS to consider the offer in compromise. Eventually they decide whether or not to accept it. If accepted, then part of the taxpayer’s debt is forgiven. The taxpayer must promptly pay for what they have promised to the government in the offer in compromise. If the offer in compromise is rejected, however, the individual must consider other options. They may choose to appeal the offer in compromise, but in such circumstances, they must have compelling new material to submit to the government.

Whether or not an offer in compromise is accepted, there are various options to explore when tackling the burdensome world of back taxes. Tax lawyers are ready to help individuals save money. Freedom, especially from taxes of any kind, is bliss.