How to Save Thousands of Dollars in Taxes, Penalties, and Interest through the IRS Offer in Compromise Program

Distressed taxpayers seeking federal relief can expect a higher acceptance rate for Offer in Compromise submissions due to state of the economy

Faced with overwhelming tax debt, more Americans than ever will be hoping to qualify for the IRS Offer in Compromise (OIC) program and save thousands of dollars in taxes, penalties and interest.

In 2007, approximately 46,000 offers were submitted to the IRS nationally and only 12,000 were accepted. Tax experts anticipate that there will be more offers submitted this year, as well as a higher IRS acceptance rate due to the state of the economy.

While the Offer in Compromise program can offer tax relief to Americans who have exhausted all financial resources available to them to pay their taxes, it also allows the government to collect a negotiated payment from distressed taxpayers now, which helps the IRS save on the administrative costs of going after people who simply don't have the money to pay their tax debt.

Although the IRS has announced that it will be taking steps to ease the tax burden on Americans hit by the recession, one of the real drivers for a spike in compromise offers will be the bursting of the real estate bubble, not the IRS promise of flexibility. For example, homeowners are typically declined for OFFER IN COMPROMISE settlements due to the equity in their homes whether or not they can "get" to it. But there are a lot more people now with net zero or negative ("upside down") equity. And without home equity to fall back on, many distressed homeowners may now be able to negotiate a reduction of their tax debt.

However, taxpayers need to remember that that the OFFER IN COMPROMISE program is a privilege, not a right, like bankruptcy. And taxpayers should beware and leery of tax resolution companies that guarantee specific results.

Tax resolution companies including tax attorneys and CPAs need to be upfront and let clients know that not everyone can qualify for this type of tax help because the IRS has very strict guidelines governing eligibility. When the economy was strong, the IRS tightened the rules on the OFFER IN COMPROMISE program, but now things have changed and there are lots of people that deserve to take advantage of the program.

Here are 10 things that every taxpayer should know before filing an Offer in Compromise.

1) What is an Offer in Compromise?

The IRS Offer in Compromise program was established by the U.S. Congress to help taxpayers who have experienced significant financial problems get a fresh start, if they qualify. The IRS has the authority to settle, or compromise, federal tax liabilities by accepting less than full payment under certain circumstances. Back tax liabilities, penalties and interest can be settled. All federal tax liens can be released once the IRS accepts the OFFER IN COMPROMISE and the negotiated settlement amount is paid.

If you qualify for IRS help through the Offer in Compromise program, you can save thousands of dollars in taxes, penalties and interest. Taxpayers can negotiate settlements on all types of taxes, including most payroll taxes, penalties, and interest. It is the closest thing to "amnesty" that the federal government offers in connection with back tax debt.

2) What do I have to do to be eligible for an Offer In Compromise?

To be eligible for an Offer In Compromise, all returns that are due must first be filed. And to qualify for an Offer in Compromise, taxpayers must prove to the IRS that they have exhausted all financial resources available to them to pay their taxes.

The OFFER IN COMPROMISE process is a very complicated drawn out process that can take upwards of six months to a year - or possibly longer. There are guidelines, rules and protocols established by operation of law, under IRC Section 7122. However, most Offer Examiners (former Revenue Officers) use the Internal Revenue Manual (IRM) as their guide.

If the layman attempts to go through this process without specialized representation from a reputable tax problem resolution firm, their Offer in Compromise will most likely get rejected and they will end up owing the IRS more money (in additional accruing penalties and interest) than when they started the process.

3) Can IRS tax debt be settled by offering a fraction of what is owed?

The Offer in Compromise program provides taxpayers who owe the IRS more than they could ever afford to pay, the opportunity to pay a small amount as a full and final payment.

The offer amount that you submit must be equal to or greater than the total value of all assets, plus future income. The total is generally the net equity of one's assets plus the monthly reasonable collection potential amount (multiplied by a factor of 48 months, 60 in deferred payment options instances) and not simply an offer of ten cents on the dollar, or a percentage of the debt.

The Offer In Comprise program is not designated to be a program for everyone with financial problems, and it should not be viewed as an invitation to avoid paying back taxes.

The minimum offer amount must generally be equal to (or greater than) the taxpayer's reasonable collection potential (RCP). The RCP is defined as his/her future income. Unless the taxpayer files an Offer In Compromise claiming special circumstances, the offered amount must equal or exceed the reasonable collection potential. Realizable value is the asset's quick sale value (amount which could be reasonably expected through the sale of the asset) minus what the taxpayer owes to a secured creditor.)

4) How do I know if I am eligible for an Offer in Compromise?

The IRS may legally compromise your tax debt for one of the following reasons:

• Doubt as to Liability (DATL) - Doubt exists that the assessed tax is correct. The Offer in Compromise program also allows taxpayers that do not agree that they owe the tax or feel that the tax has been incorrectly calculated, has an opportunity to file a DATL Offer in Compromise and have their tax liabilities reconsidered.
• Doubt as to Collectibility (DATC) - Doubt exists that the taxpayer could ever pay the full amount of tax owed. A DATC Offer in Compromise is negotiated on the basis of a taxpayer's inability to pay and takes into account the taxpayer's current financial position including the taxpayer's equity in assets.
• Effective Tax Administration (ETA)- If there is no doubt that the tax is correct and there is potential to collect the full amount of the tax owed, the IRS may consider an OFFER IN COMPROMISE under exceptional circumstances in which a taxpayer demonstrates that the collection of the tax would create an economic hardship or would be unfair and inequitable. This includes situations where compelling public policy or equity considerations provide sufficient basis for compromise.

In submitting an offer based on Effective Tax Administration, the taxpayer needs to provide extensive narrative of the special and extraordinary circumstances along with the rest of the offer in compromise documentation. Right now, extraordinary circumstances would mean some sort of life and death situation, such as a serious medical condition.

The taxpayer bears the burden of proof to show their Offer In Compromise qualifies for public policy or equity considerations. They must show that their circumstances are compelling enough to justify acceptance of their Offer In Compromise compared to other taxpayers in similar circumstances.

5) When does a Collection Information Statement need to be completed?

The Collection Information Statement (CIS) is commonly used by the IRS to gather the necessary information to determine the taxpayer's ability to pay. The CIS is the taxpayer's financial statement and disclosure of personal information including assets, income and expenses. These forms are signed by the taxpayer under penalty of perjury.

The forms used are Form 433-A for individuals and Form 433-B for businesses. Failure to submit these documents will cause considerable delay (or return of the OFFER IN COMPROMISE) in the process. These are generally used for Installment Agreements and Offers in Compromise.

In addition to these forms, IRS personnel may use an abbreviated one page form called Form 433F for individual taxpayers who owe less than $25,000. This is only generally used in Installment Agreement cases, where the taxpayer has a good compliance history.

The IRS has established standards for allowable and necessary monthly living expenses. The 433-F is only used, sparingly, for installment agreements only, not in OFFER IN COMPROMISEs.

Collection Information Statement(s) are required for all Doubt as to Collectibility and Effective Tax Administration Offers In Compromise. Doubt as to Liability offers do not require form 433-A or Form 433-B be submitted.

6) If I qualify for an Installment Agreement, can I still submit an Offer In Compromise?

If a tax liability can be paid in a lump sum or through an installment agreement, taxpayers will not be considered for an Offer In Compromise.

If an Offer In Compromise is rejected, it will be rejected with appeal rights. If an Offer is returned unprocessible you will not be able to appeal this decision.

7) The IRS recently levied my bank account. Will the levy proceeds be returned if I file an Offer In Compromise?

The IRS will keep all payments and credits made, received or applied to the total original tax liability before the Offer In Compromise was submitted.

The IRS may also keep any proceeds from a levy that was served prior to the submission of an Offer In Compromise, but which were not received at the time the Offer In Compromise was submitted.

8) Can I file an Offer In Compromise to delay collection action?

Once it is determined an Offer In Compromise was filed solely to hinder and/or delay collection actions, the IRS will return the Offer In Compromise without any further consideration.

Taxpayers will not be afforded the right to appeal this decision.

9) Are partial payments required with Submission of an Offer In Compromise?

Effective, July 17, 2006, the IRS has mandated a requirement that any lump-sum payment or "cash" (within/over 5 months) offer must be accompanied by the payment of a non-refundable 20% deposit of the offer amount. For this purpose, a lump-sum offer in compromise is any offer of payment made in five or fewer installments.

Any periodic payment offer in compromise (24 month short term deferred) must be accomplished by the payment of the amount of the first installment. The IRS will treat any failure to make an installment due under a periodic payment offer in compromise while the offer is being evaluated by IRS as a withdrawal offer.

Both the 20% deposit on lump-sum payment offers and payments on the periodic installment offers are in addition to the $150.00 user application fee.

10) What happens to my Offer In Compromise application fee if my offer is accepted or declined?

The application fee for submitting an Offer In Compromise is $150. The $150 (and the 20% deposit or the periodic payment) is retained until the IRS determines whether the Offer In Compromise can be accepted for processing. The 20% deposit will be applied against the earliest year of taxes owed (unless designated by the payor differently) and is not refundable to the taxpayer if the OFFER IN COMPROMISE is returned or rejected. The $150 application fee is non-refundable as well.

Federal agencies are authorized to establish charges for services provided by the agency, called "user fees". The U.S. Office of Management and Budget encourages agencies to implement these fees to recover the cost of providing special services to some recipients that others do not use.

The IRS has established a user fee that will recover part of the cost of processing and reviewing Offer In Compromise requests. The IRS has chosen to call it an "application fee" because the fee is required when an Offer In Compromise application is submitted for consideration.

If your Offer In Compromise is not accepted, the application fee, the 20% lump sum deposit and the periodic payment amount will be retained by the IRS. This includes situations where:

• The taxpayer's initial Offer In Compromise amount is too low - based on the IRS evaluation of the taxpayer's financial condition - and the taxpayer is given the opportunity to increase it.
• The taxpayer does not increase the Offer In Compromise amount, or show special circumstances, and the IRS rejects the Offer In Compromise.
• The taxpayer fails to submit additional financial documents to assist in the IRS review.
• The taxpayer fails to respond, and/or submit the requested information, and the Offer In Compromise is returned without further consideration.
• The taxpayer chooses to withdraw the Offer in Compromise.

For more information on submitting an Offer in Compromise or to get professional tax advice on reducing your IRS debt, visit www.taxresolution.com for a free tax relief consultation or call 866-477-7762.

Michael Rozbruch is one of the nation's leading tax experts. A Certified Tax Resolution Specialist (CTRS), licensed CPA in the state of Maryland and the founder of Tax Resolution Services (http://www.taxresolution.com/), he helps individuals and small businesses solve their IRS problems and is dedicated to educating the public on tax planning and other strategies for managing their personal and business finances.