Offer in Compromise Guidelines
The acceptance of an offer is based upon:
- Doubt as to the liability of the taxpayer or
- Doubt as the Taxpayers ability to pay the full tax due or
- A combination of these two factors
“Doubt as to Liability” means you don’t owe all or a portion of the tax debt the IRS has on its records and is trying to collect. The IRS Form 656 (May 2001) simply states this concept as, “Doubt exists that the assessed tax is correct.”
“Doubts as To Collectability.” As described on Form 656, means, “Doubt exists that you could ever pay the full amount of tax owed.”
Left to their own devices, probably nearly everyone would assert that they had “insufficient assets and income” to pay their taxes. Determining how much a Taxpayer can pay within a “reasonable period of time” (a criterion not quoted above, but an important factor), and convincing the IRS of the correctness of position is the "nub" of the art of getting an Offer processed and accepted.
An Offer in Compromise deemed to be “processable” by the IRS is usually assigned to an Offer Specialist. Since the designation of the Offer Specialist did not exist until quite recently, many of the Offer Specialists are “recycled” IRS Revenue Officers. These Revenue Officers have the unenviable job of collecting unpaid taxes and unfiled returns. Consequently, quite a few IRS Collection employees, Revenue Officers, have become known for toughness and tenacity in tax collection matters.
Since many of the relatively new Offer Specialists are former Revenue Officers, it should be assumed that many of the IRS “recycled-employees” are not ideally suited for these new positions. Providing a “Fresh Start” to Taxpayers (one of the stated goals of the 1999 Offer in Compromise procedures) is not an objective viewed with favor by many of the Offer Specialists; hence the Taxpayer’s need for my help.
The objectives of the Offer Specialist are to verify the data and in general make a determination of whether the amount offered is adequate. As indicated above, finding the correct amount to offer and convincing an Offer Specialist (and Appeals Officer, if there is an appeal) that the Offer should be accepted often requires much patience.
Throughout the period, an Offer in Compromise is being considered by the IRS, various employees become involved and there will be requests for updated or additional materials. For example, an Offer Specialist or Appeals Officer may ask for new pay stubs to see if the Taxpayer is earning more income.
IRS Appeals Officers
If an Offer in Compromise is rejected by an Offer Specialist, the rejection can be appealed by filing a Written Protest with an IRS Appeals Officer, a type of administrative judge. Appeals Officers are more inclined to reach an accord with the taxpayer on a disputed Offer in Compromise. Do not expect, however, that every appealed Offer will be successfully negotiated at the appeals level.
It should always be remembered that the IRS players are employees of the IRS and are inevitably bound by the dictates of the agency. For example, if all the Taxpayer’s returns are not filed, an Offer in Compromise will NOT be accepted no matter what the Taxpayer does. The most recent Government shutdown may affect the IRS’s flexibility in offers.
Appeals to the U.S. Tax Court
In 1998, Internal Revenue Code Section 6320 was adopted, allowing appeals of rejected Offers to the U. S. Tax Court using an “abuse of discretion” standard. The petition needs to be filed within 30 days of the Appeals Officer's decision. There is, as yet, virtually no history of implementation or reported cases under these new Code Sections, so it is impossible to predict how the Tax Court will apply these rules.
The IRS manual, IRM section 57 (10) (10).1(1), addresses the subject as follows:
An Offer is adequate if it reasonably reflects collection potential. This will include amounts that can be collected from other parties through suit, assertion of transferee liability, 100 percent penalty and other actions. Additional consideration will be given to assets and income that are available to the Taxpayer but beyond the reach of the government.
This section, part (4), concludes with the warning to Offer Specialists:
If an Offer is rejected because more can be collected than offered, it is generally expected that the amount determined to be collectable will actually be collected (by the IRS).
The above reasoning adequately explains why, if possible, getting a relative or a friend to pay the offered amount is often vitally important. If someone other than the Taxpayer will post the amount offered, this is the money that the IRS cannot otherwise access. Clearly, IRS employees are warned not to pass up funds they cannot otherwise obtain, and if they do pass on the funds offered by a nonliable party, they must be sure the amount is collected from the Taxpayer later.
In 2010, however, only 24% of the Offers submitted were accepted by the IRS. This decrease in the acceptance of Offers is due, in part, to the more stringent Offer rules adopted by the IRS.
Time to Process
Under the changes made by Congress in 2006, if an offer is not rejected within 24 months after the date of submission, it will be deemed to be accepted. It is still true, however, that the appeals process has no such time restrictions. For this reason, it is not expected that the Offer acceptance process will be sped up in any significant way.
In cases when the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years, and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted. The best option is to pay the offer in five months with 20% down.
What Does This Cost?
National tax collection firms charge in the average range of $5,000.00-plus for the process, with clerks doing most of the contact. My fees are half of that. When you retain me, I do all the negotiation and contact with the IRS. I bring over 35 years of experience to the table. Oh, by the way, the IRS clips you for a $150.00 application fee.
Feel free to contact me with any questions concerning this process or any tax problems.
Jeffrey W. Burzawa, Esquire
Licensed in front of U.S. Tax Court