- Tax Controversy and Litigation
Tax and Estate Planning
- Tax Controversy and Litigation
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An offer in compromise (“OIC”) is an agreement between a taxpayer and the government that may settle a tax liability for less than the full amount owed, and is one of the major tools in a tax collection case that should be considered.
The decision to accept or reject an offer in compromise is left to the discretion of the IRS and Secretary of the Treasury. Each offer in compromise that is properly submitted to the IRS undergoes a thorough review process, during which the IRS usually requests additional information and documentation in order to determine whether the offer should be accepted or rejected. An offer that is accepted by the IRS becomes binding and is enforceable as a contract, according to its terms. If the IRS accepts the offer, tax liens are removed and enforced collection is avoided.
The statutory authority for an IRS offer in compromise can be found in IRC § 7122, which provides in part:
From the IRS’s perspective, the offer in compromise program serves to:
- Collect what can reasonably be collected at the earliest possible time and at the least cost to the government,
- Achieve a resolution that is in the best interests of both you and the government,
- Provide you a fresh start toward future voluntary compliance with all filing and payment requirements, and
- Secure collection of revenue that may not be collected through any other means.
What Can I Expect from the Offer in Compromise Process?
The offer in compromise process can be relatively simple, or complex, depending on your financial situation and desired settlement amount.
Before making an offer in compromise, you should undergo a thorough analysis to have a complete understanding of your case, especially the amount of the unpaid liability and the tax years and/or periods for which the liability is owed.
The IRS requires that you submit a collection information statement when an offer in compromise is filed. The preparation of the financial statement is an initial step to determine the options for resolving your liability. The financial statement may indicate that you are unable to pay the full balance due, in which case an offer in compromise may be an appropriate course of action. In contrast, if the financial statement indicates that you can pay the balance due in full, an installment agreement may be a more appropriate option. The financial statement should lead to the appropriate collection alternative.
While preparing the financial information and forms to be filed for your offer in compromise, it is critical that you carefully review the collection information statements and all supporting documents (such as bank statements). Taxpayers sometimes forget that they have certain assets that must be disclosed. The IRS conducts a thorough investigation of your assets, liabilities and tax returns. Failure to disclose an asset has serious consequences.
During this pre-application and due diligence period, it is critical that you be in compliance with your current tax filing and payment requirements. The IRS generally will not consider an offer in compromise if you have delinquent returns. You must also be current with any estimated tax payments or have adequate withholding.
Applying for an Offer in Compromise and Immediately Thereafter
An offer in compromise is generally submitted by mailing a complete application to a special unit within the IRS. An offer in compromise becomes pending when it is accepted for processing by the IRS and a delegated IRS official signs and dates the Form 656. This date is the official offer pending date. The date on which an offer becomes pending is important for a few reasons. First, the statute of limitations for collection of the underlying liability is suspended while the offer is pending. Second, once your offer is pending, the clock begins to run on the 18-month period for the IRS to act on the offer before it is deemed to be accepted by law. Additionally, for a taxpayer considering a bankruptcy filing, the pending date is important because the calculation of the 240-day period before which any tax must be assessed to be dischargeable does not include the period that an offer is pending, plus an additional 30 days.
Every offer that is received by the IRS falls into one of two categories: processable or not processable. An offer is processable if it meets certain minimum criteria for consideration. Otherwise it is not processable, and will generally be returned to the taxpayer.
You will usually receive confirmation via mail within several weeks after filing for an offer in compromise. You may also receive some correspondence asking for additional information to support your offer.
What are the Effects of Making an Offer in Compromise?
The IRS is generally prohibited from levying you to collect the tax liability that is the subject of an offer in compromise while your offer is pending, for 30 days following the rejection of your offer, and while any appeal of the rejection is being considered.
Making an offer in compromise also extends the amount of time the IRS has to collect the tax liability at issue. The IRS generally must collect your tax liability within ten years after the date the tax is assessed. However, the statute of limitations for collection of your tax liability is suspended during the period that collection by levy is prohibited – while your offer is pending, for 30 days following the rejection of your offer, and while any appeal of the rejection is pending.
You will remain responsible for the full amount of the liabilities, unless and until the IRS accepts your offer in writing and you have met all the terms and conditions of the offer. The IRS will not remove the original amount of the liabilities from its records until you have met all the terms and conditions of the offer.
Evaluation and Negotiations of your Offer in Compromise
Once your offer is assigned to an offer examiner or offer specialist, the offer will be reviewed to determine if it contains sufficient information to make a decision on the merits of the offer. If additional information is needed, the IRS will contact you to request the necessary item(s). You may also be asked to verify compliance with your current estimated tax payments and/or current federal tax deposits.
If the request for information is in writing, the request will include:
- a list of the specific items needed,
- a specific deadline for providing the information,
- a statement cautioning you that the offer will be returned without further consideration if the requested information is not provided,
- the name, phone number and employee ID of the IRS employee investigating the offer,
- a statement indicating that a notice of federal tax lien may be filed, and
- a statement addressing any potential special circumstances, such as with an offer based on effective tax administration or doubt as to collectability with special circumstances.
Note that if the IRS does send you a request for more information, the response to it is time sensitive – generally 30 days. Failure to cooperate and give the necessary information could result in your offer being returned without appeal rights.
The IRS may contact third parties in order to respond to your offer, and by filing an offer in compromise you authorize the IRS to make such contacts. Further, by authorizing the IRS to contact third parties, you understand that you will not receive notice, pursuant to section 7602(c) of the Internal Revenue Code, of third parties contacted in connection with this request.
After all of the necessary information has been obtained from you, the IRS evaluates the information and determines whether your offer is acceptable, negotiable, or not acceptable. If the offer in compromise is accepted, you may receive a notice like that below.
Can I Appeal a Rejected Offer in Compromise?
Yes. Many offers in compromise that are submitted to the IRS are rejected. However, taxpayers have the right to an administrative appeal of the rejection by the IRS Appeals Office.
It is important to distinguish between an offer that has been rejected based on the merits of the offer and one that has been returned to you for other reasons. You may only appeal the rejection of an offer, that is, a determination by the IRS that your offer should not be accepted on its merits. There is no right to appeal the IRS’s decision to return your offer. An offer may be returned to you for a number of reasons, including if the IRS determines that it is not processable, that it was submitted solely to delay collection, or if you fail to provide requested financial information while the offer is pending.
Before the IRS rejects an offer in compromise (i.e., notifies you that the offer has been rejected), it is required to conduct an independent administrative review of the proposed rejection. The IRS reviews each case to determine if the proposed rejection is reasonable based on the facts and circumstances of the case.
If the proposed rejection is sustained by the independent reviewer, the IRS issues a written notice to you. Once an offer in compromise is rejected, you only have 30 days to appeal the decision to the IRS Office of Appeals.
Once the case is assigned to an Appeals Officer, he or she will send you a letter explaining the appeals process, a list of the disputed issues, and a request that you provide any additional information that he or she wants to consider.
The Appeals officer will conduct an appeals conference, which will include an explanation of the offer process, how an acceptable amount is computed, how the available financial data supports either acceptance or rejection of the offer and, if applicable, what information you can provide or actions to take that could make a compromise a viable resolution.
What is Expected of Me Throughout the Offer in Compromise Process?
During this process, taxpayers should:
- Be current with their tax obligations (filing, making estimated payments, etc.)
- Respond promptly if a request for information is made.
In addition to these expectations, there are conditions that you must agree to with the IRS as part of the offer in compromise process:
- Any payments made under the offer in compromise are generally not refundable even if you withdraw the offer prior to acceptance or the IRS returns or rejects the offer. If the offer is accepted, the IRS will apply payments made after acceptance in the best interest of the government.
- The application fee for your offer will be kept by the IRS unless the offer is not accepted for processing.
- You must comply with all provisions of the Internal Revenue Code relating to filing your returns and paying your required taxes for 5 years or until the offered amount is paid in full, whichever is longer.
- You will be waiving and agreeing to the suspension of any statutory periods of limitation (time limits provided by law) for the IRS to collect the tax at issue.
- The IRS will keep all payments and credits made, received or applied to the total original liability before submission of this offer. The IRS will also keep all payments in excess of those required by section 7122(c) that are received in connection with the offer and that are not designated as deposits. The IRS may keep any proceeds from a levy served prior to submission of your offer, but not received at the time your offer is submitted. As additional consideration beyond the amount of your offer, the IRS will keep any refund, including interest, due to you because of overpayment of any tax or other liability, for tax periods extending through the calendar year in which the IRS accepts the offer.
There are other conditions that are listed on IRS Form 656, and taxpayers are encouraged to review those items.
Why McLaughlin Legal?
McLaughlin Legal is a boutique San Diego tax firm, and we have helped negotiate multiple offer in compromises for individuals and businesses, settling individual income taxes, corporate income taxes, payroll taxes, and Trust Fund Recovery Penalties. McLaughlin Legal’s clients reduce their tax debt on average to 13% of the total amount originally owed the IRS before an offer in compromise. If you have questions about an offer in compromise and whether you qualify, we encourage you to contact McLaughlin Legal to discuss the program, your unique circumstances, and what IRS collection alternative exist in your case.
Interested in Learning More?
If you are interested in learning more about an offer in compromise, please feel free to contact us today for a free consultation.