This is the seventh post in the Collection Options series. This series is dedicated to presenting individuals and businesses with options for dealing with outstanding tax obligations.
Offer in Compromise – IRS. The IRS and the MDR have the authority to settle, or compromise, tax liabilities by accepting less than full payment under certain circumstances. This post deals with the procedures established by the IRS.
Doubt as to Collectibility (DATC). IRM 5.8.1. An Offer in Compromise is precisely what the name implies. A taxpayer Offers to pay the Internal Revenue Service a portion of the amount it currently shows as owing, and, in return, the Internal Revenue Service will compromise and release the taxpayer from the entire liability. Obviously, the taxpayer must give the IRS something it does not already have to achieve a successful Offer in Compromise.
Forms 656, 433-A and 433-B. An Offer in Compromise is submitted on Form 656. With this Form, the taxpayer must submit a completed financial statement, Form 433-A for individuals and sole proprietorships, and Form 433-B for corporations or other business entities. With these financial statements, the taxpayer must submit verification as required in the Form, like copies of bank statements, pay checks, mortgage payments, medical expenses, etc. The information on these forms will give you what you need to calculate the taxpayer's excess monthly income and the quick sale value of the taxpayer's assets.
Lump Sum Cash Offer. The Offer amount must be paid in five or fewer installments, upon written notice of acceptance. The taxpayer is required to pay 20% of the total amount of the Offer when the Offer is submitted. The amount of the Offer is the realizable value of the taxpayer's assets plus forty-eight months of payments equal to the taxpayer's monthly excess income. If the ten-year collection statute of limitations expires in less that forty-eight months, the number of months used to calculate the Offer will often be the months remaining in the collection period.
Example. If a taxpayer has $5,000 of net quick sale value in his or her assets and $100 of excess income per month, his/her Offer amount will be $9,800 if paid in five or fewer installment payments. The required 20% down payment will be $1,960. (Assuming that the statute of limitations on collections is not less than forty-eight months.)
ShortTerm Periodic Payment Offer. The amount of the Offer must be paid within 24 months from the date the IRS received the Offer. The first payment must be submitted along with the Offer and these payments must continue during the Offer investigation. The amount of the Offer is the realizable value of assets plus the total amount the IRS could collect from payments of monthly excess income over sixty months (or the remainder of the ten-year statutory period for collection, whichever is less). The IRS may file a tax lien on tax liabilities compromised under short-term payment Offers.
Example. If a taxpayer has $5,000 of net quick sale value in assets and $100 of excess income per month, his/her Offer would be $11,000 paid over two years. In this case, the taxpayer's monthly payment would be $458.33 ($11,0000/24). This assumes the statute of limitations on collections is not less than sixty months.)
Deferred Periodic Payment Offer. The amount of the Offer must be paid in regular payments over the remaining statutory period for collecting the tax. The first payment must be submitted along with the Form 656 and these payments must continue during the Offer investigation. The Offer amount must include the realizable value of the taxpayer's assets plus the amount the IRS could collect through monthly payments of excess income during the remaining life of the collection statute.
Doubt as to Liability Offer (DATL). IRM 126.96.36.199 This type of Offer should be submitted if there is a legitimate doubt whether the taxpayer owes part or all of the assessed tax liability. These Offers are handled more like an audit reconsideration and will involve a review by the exam division. These offers usually involve a mistake by the IRS in the inclusion of an item in income, the disallowance of a deduction or the simply miscalculation of the liability. This is not a second “bite at the apple.” If the IRS has already addressed the issue in Appeals, and the taxpayer still objects to the liability, the taxpayer will most likely have to pursue the matter in court.
Effective Tax Administration Offer (ETA). IRM 188.8.131.52. The Internal Revenue Service also has an “Effective Tax Administration” Offer in Compromise when a taxpayer does not qualify for a DATC or DATL offer. Under this type of Offer in Compromise, the taxpayer owes the taxes and has sufficient assets to pay the full amount of the tax obligation, but due to exceptional circumstances, full payment would cause economic hardship or would be unfair and inequitable. The IRS is looking for reasons based on:
Economic Hardship. For example, the taxpayer is retired and his only income is from a pension. The only asset is a retirement account and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without adequate means to provide for his basic living expenses. The taxpayer's overall compliance history does not weigh against compromise. IRM 184.108.40.206.1.7.
Public Policy and Equity.
The taxpayer's liability was directly caused by a processing error on the part of the Service and would otherwise have been avoided. The taxpayer incurred the liability because of having followed erroneous advice or instructions from the Service. If actions or inaction of the Service unreasonably delayed resolution of the taxpayer's case and interest or penalty abatement is not available, compromise may still be warranted if the circumstances are sufficiently compelling. The taxpayer can demonstrate that the criminal or fraudulent act of a third party is directly responsible for the tax liability. Compromise may be appropriate where there is clear and convincing evidence that rejecting the OIC, and pursuing other collection alternatives, would have a significantly negative impact on the community in which the taxpayer lives or does business, i.e. does the taxpayer provide essential services to the community that would be lost if the tax liability was collected in full? The taxpayer was incapacitated and thus unable to comply with the tax laws.
Not Undermine Compliance. Compromise under the ETA economic hardship or non-economic hardship provisions is permissible if acceptance does not undermine compliance. The public should not perceive that the taxpayer whose offer is accepted benefitted by not complying with the tax laws. For example:
The taxpayer has an overall history of noncompliance with the filing and payment requirements of the Internal Revenue Code. The taxpayer has taken deliberate actions to avoid the payment of taxes. The taxpayer has encouraged others to refuse to comply with the tax laws.
Excess Monthly Income. The other issues identified above in the discussions of installment agreements, section II E 4, are relevant here as the amount of excess monthly income is key to calculating the offer amount.
Extending the Statute of Limitations on Collections. Before a taxpayer submits an Offer, they should carefully calculate the impact it will have on the statute of limitations on collections. The IRS has 10 years from the date of assessment to collect the tax. Submitting an Offer to the IRS automatically extends the statute one year plus the time the Offer is being considered, until it is rejected or withdrawn. If there is only one year left on the statute of limitations for collection and the IRS is not taking any collection action, it may be more appropriate for the taxpayer to simply let the statute of limitations expire, and yes, that does happen.
Appealing a Rejected Offer. If the Offer is rejected, the taxpayer has the right to appeal and continue negotiations on that Offer. The original Representative investigating the Offer may make a mistake in what to include in income, the value of an asset, what to allow for expenses or a simple calculating error. The Appeals Office can and will correct these errors.