Offer in Compromise Featured Article

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. A qualified adviser can evaluate eligibility and prepare supporting evidence; representation does not guarantee success.

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. A rejected offer does not reduce the assessed debt. Therefore, an Offer in Compromise is exceptionally important and potentially helpful to those in financial need.

Eligibility

Eligibility depends on the basis for compromise, financial facts and current filing and payment compliance. Hardship or an income bracket alone does not establish eligibility or acceptance.

The qualifications of submitting an Offer in Compromise can be summarized by answering the following questions:

How much money can the taxpayer pay and how much money should be “forgiven” by the Offer in Compromise?

Does the taxpayer’s income history support an Offer in Compromise?

Do the taxpayer’s recent expenses reflect the potential information that will be provided by the Offer in Compromise?

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?

An offer settles an agreed tax liability for less than the full amount. Eligibility depends on the applicable basis for compromise and the taxpayer’s financial circumstances.

A medical emergency is not a universal prerequisite. The IRS reviews ability to pay and relevant special circumstances.

The proposed amount must be supported by the relevant financial forms and documentation.

The Taxpayer’s Income

The IRS evaluates an offer using the applicable grounds and the taxpayer’s financial circumstances, including income, assets and allowable expenses. Low income by itself does not guarantee acceptance. Related guidance: Offer in Compromise.

Low income does not guarantee acceptance. Assets and other eligibility requirements still matter.

An accepted offer compromises the specified liabilities only under its terms. The taxpayer must meet the payment terms and remain current with filing and payment obligations for five years after acceptance. Default may restore the compromised debt, less payments made. See back taxes.

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

Necessary living expenses are evaluated under IRS collection standards and the taxpayer’s circumstances. High expenses alone do not establish entitlement to an offer; assets, future income and the applicable acceptance grounds also matter. Related guidance: back taxes.

Provide complete, accurate financial information and the documentation required by the current offer application. If records are unavailable, explain the circumstances and seek guidance about acceptable support. Missing documents alone do not establish fraud, and neither legal representation nor documentation guarantees acceptance. Related guidance: Offer in Compromise.

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. Filing compliance alone does not establish eligibility: required estimated payments, employer deposits where applicable, and the absence of an open bankruptcy proceeding also matter.

The Offer in Compromise Form

Current Form 656 Section 3 provides grounds for doubt as to collectibility, effective tax administration based on economic hardship, and effective tax administration based on public policy or equity. A doubt-as-to-liability offer uses Form 656-L. Doubt as to collectibility is a recognized basis for compromise and requires the appropriate financial support. See Offer in Compromise.

Doubt as to Collectability

Doubt as to collectibility is a recognized offer ground when the taxpayer’s assets and income are less than the tax liability. The IRS evaluates the required financial information and applicable collection potential. A supported application must satisfy the criteria; choosing this ground neither guarantees acceptance nor makes the offer inherently weak.

Exceptional Circumstances

Special circumstances may support an offer, but do not replace the applicable legal and financial criteria.

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. A well-supported explanation does not guarantee acceptance; the IRS evaluates the applicable criteria and financial evidence. 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

Low-income certification uses either the most recent Form 1040 adjusted gross income or gross household monthly income annualized, compared with the current chart. Income equal to or below the applicable amount may qualify. Certification applies to qualifying individual liabilities, including sole proprietorships; it does not itself establish offer acceptance. See Offer in Compromise.

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. The IRS evaluates whether the offer meets the applicable criteria 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.

Payment terms must comply with current Form 656 and any specifically approved changes. Evaluate the payment options using verified financial circumstances and the required payment schedule. See back taxes.

The payment options differ. Low-income certification may waive the application fee and required initial and review-period payments.

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 five months after acceptance, in five or fewer payments. 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 the first proposed monthly payment with the application, followed by monthly payments while the IRS considers the offer, unless low-income certification applies. 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. Form 656 specifies periodic payment over 6 to 24 months, counting the first payment as month 1.

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.

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.

The five-payment limit applies to lump-sum offers. Periodic offers use monthly installments; payment terms must comply with Form 656.

After submitting an Offer in Compromise

Non-refundable payments

Required offer payments generally are not refundable and are applied to the tax debt. The application fee is separate from offer payments; an application fee may be returned when the offer is not accepted for processing. Qualifying low-income certification waives the fee and required initial and review-period offer payments.

Tax Liens

While an Offer in Compromise is being processed, the IRS may still file for a tax lien. A federal tax lien is a legal claim against property; it does not transfer ownership to 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

A processable offer acknowledged as pending generally restricts new levies, subject to applicable exceptions. Notices, lien filings and certain existing continuous levies may continue. Current filing and payment obligations remain. Specified periods suspend the collection statute; this is not a general extension of current tax payment deadlines. See back taxes.

Extensions

A pending processable offer can suspend the collection limitations period under applicable rules. It does not generally extend deadlines for filing current returns or paying current taxes. Continue required filing and payments while the offer is evaluated.

Previous Installment Agreements

IRS instructions generally do not require payments on an existing approved installment agreement while the IRS considers an offer. Confirm the offer status and continue required current tax obligations. If the offer is not accepted, follow IRS instructions about reinstatement or another arrangement. See Offer in Compromise.

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 within two years of IRS receipt, it is generally deemed accepted; appeal periods are excluded. 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

The IRS evaluates the applicable compromise ground, financial evidence and any relevant special circumstances. Extraordinary hardship or unfairness is not a universal requirement for every offer.

After an offer is accepted, the taxpayer must comply with its payment and other terms, including the required period of filing and payment compliance. Default can cause reinstatement of the compromised liability, subject to credits for payments. Acceptance is not unconditional permanent immunity from the debt. Related guidance: back taxes.

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

A rejected offer may be appealed within 30 days of the rejection letter. A returned offer is different and generally carries no appeal right. Review the notice before choosing the next step.

An offer rejection generally may be appealed within 30 days of the rejection letter. Explain the disagreement and provide relevant facts, law and evidence. New material is not a universal prerequisite. A returned offer is different and generally has no appeal right.

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.

See What the IRS Has to Say About Offer In Compromise:
https://www.irs.gov/payments/offer-in-compromise