Keys to Unlock a Successful Offer in Compromise ©
by Nicholas Hartney, EA © of Genesis Tax Consultants, LLC©
Contact me: Nicholas Hartney Licensed to Represent Taxpayers Before the IRS
The Offer in Compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s liability for some amount which is less than the full amount due. The IRS has the authority to settle or compromise federal tax liabilities by accepting less than full payment under certain circumstances.
The taxpayer makes an Offer in Compromise on Form 656. If the IRS accepts the Offer in Compromise, then a contract is formed in which the IRS agrees to cancel the tax debt in return for the payment of the agreed sum. The IRS has a whole set of rules, policies and procedures which govern when it will accept an offer.
Unfortunately, you just don’t offer to pay them 10, 25, or 50 cents on the dollar. They look at your offer, compare it to their guidelines and then either accept it, reject it or encourage you to offer more money. For an offer to be acceptable it must be based on one of three theories.
The IRS has made changes to the Offer in Compromise program that makes it much more likely that your Offer will be accepted. For the updated article please click on the link above.
In 2016 taxpayers submitted 63,000 offers in compromise to settle back tax liabilities for less than the full amount owed. The IRS accepted 27,000 of those offers, amounting to an acceptance rate of nearly 43% of all offer in compromises submitted.
There are Three Types of Offers:
1) Doubt as to Liability;
2) Doubt as to Collectibility; and
3) Effective Tax Administration.
Doubt as to liability means that there is some reason that you don’t owe the tax or doubt exists that the assessed tax is correct. This does not mean that you have doubt that you don’t owe the tax or part of it. It means that the IRS has doubt about you owing the tax, and in my experience, the IRS never doubts that you owe the tax.
They are in the business of taking your money. Why would they ever wonder or care if there was a possibility that you did not owe the tax? It is not their job to care about you.
However, if there is clear evidence that you don’t owe the tax or part of it, a professional can usually get all or part of the tax abated without you having to pay anything. I have not found offers based on Doubt as to Liability to be very useful. Let's be clear about that.
Usually when people come to see us about their unpaid taxes, the liability is legally established and there is no doubt that they have a valid assessment. That is not to say the assessment is correct. The IRS is always making mistakes, but the taxpayer must defend against the assessment before it is made. Once an assessment is made there is a strong legal presumption it is correct. I know what you are thinking but I don’t make up the rules.
Doubt is to Collectibility is where the IRS has doubts that you could ever pay the full amount. I have to emphasize the word "ever." If the IRS feels that if there is a chance that you could ever pay the liability prior to the running of the ten year statute of limitations, they will not compromise with you. DON’T FORGET THIS! If the IRS feels that if there is a chance that you could ever pay the liability prior to the running of the ten year statute of limitations, they will not compromise with you.
Effective Tax Administration is where there is no doubt that the tax is correct and no doubt the amount owed could be collected, but an exceptional circumstance exists that allows the IRS to consider the offer. To be eligible for a compromise on the basis of Effective Tax Administration you must demonstrate that collection of the tax would create an economic hardship or would be unfair and inequitable. I have been trying to find out for years what this means and have only a little insight.
These are some non-exclusive factors outlined in the IRS training materials to be used to determine when there is an economic hardship:
• Long term illness, medical condition, or disability that renders the taxpayer incapable of earning a living;
• Liquidation of assets to pay the tax liability would create an inability to meet reasonable basic living expenses;
• Taxpayers are unable to borrow against the equity in assets and sale of the asset would have sufficient adverse consequences such that enforced collection is unlikely.
Sometimes the IRS runs upon a situation where it would get a lot of bad publicity if it tried to collect the tax, like foreclosure on an orphanage. In such a case they try to bend the rules to classify the account as uncollectible. Somebody puts a code 53 on the account and hopes nobody else at the IRS will notice. I am not sure why anyone in this situation would want to pay money to compromise a liability that the IRS is not going to enforce. Why not just sit it out in 53 status until the statute of limitations run?
This is the example the IRS gives its employees when describing an offer that should be accepted on the basis of Effective Tax Administration:
"The taxpayer is disabled and lives on a fixed income that will not, after allowing basic living expenses, permit full payment of the liability through an installment agreement. The taxpayer owns a house that has been specially equipped to accommodate his disability. There is sufficient equity in the house to full-pay the liability. However, because of his fixed income and limited earning potential, the taxpayer is unable to obtain a mortgage or borrow against the equity. In addition, because the taxpayer’s home has been specially equipped to accommodate his disability, forced sale of the residence would create severe adverse consequences for the taxpayer, making such a sale unlikely."
Now since the IRS is not going to seize this guy’s house or levy on his income, why would he want to make an offer? He could just sit back and wait until the statute of limitations runs. This may not be the way out for you, but keep in mind that the sadder your story the more likely the IRS is inclined to accept an offer as to Doubt as to Liability. If you have a sad story then you will want to use it with your Offer as to doubt as to collectibility. The Offer Specialist is instructed to consider all special circumstances.
When you make your offer, be sure to include an attachment that spells out your sad story. Make it sound as pitiful as possible but stay within the bounds of the truth. Still put as sympathetic a spin on the story as you can. Be sure to include as many of these buzz words as you can: hardship, economic hardship, medical condition, illness, disability, and basic living expenses. Underline them, highlight them or bold them so that they jump out at the reviewer.
Here are the forms you will need if you wish to try and tackle this yourself :
Click here for new changes to IRS Offer Program (i.e. increased allowable living standards and change in their calculation from 48 months to only 12! More people now qualify for opportunity to lower tax debt http://nickhartneyea.blogspot.com/2012/07/what-successful-irs-offer-in-compromise.html).
http://nickhartneyea.blogspot.com/2012/07/what-successful-irs-offer-in-compromise.html
This client owed over $65,000 and as you can see below the IRS settled for $5000 through their Offer in Compromise program. This of course is not typical for every client. The selling points for convincing the IRS to settle on this taxpayer's debt was his age (over 60), health issues (artery disease), and lack of assets and monthly disposable income.
Offers are very difficult to negotiate. The IRS accepts less than 25% of the Offer in Compromises submitted according to the most recently published IRS Data Book. Now with that said, I am sure there are many taxpayers and tax professionals who submit offer in compromises just to "buy time" before the IRS starts shooting out bank levies, wage garnishments, seizures, account receivable levies, etc. so this will skew the numbers, but nonetheless they are certainly not a given to be accepted.
With that said, it is worth it if it looks like there may be a reasonable shot of having an offer in compromise approved. It is the number one tax resolution strategy for saving money if approved (or negotiated to an amount you and the IRS agree upon). If it fails you have appeal rights, if that fails you can petition the tax court or simply enter into another type of resolution with the IRS such as an installment agreement, partial payment installment agreement, currently not collectible (status 53), or if you have a business a reorganization may work if it does not have too high of equity in its assets. As with any negotiation it is worth starting with the most attractive options (offer in compromise) first and if it is not successful move down to one of the other tax resolution strategies mentioned.
Nicholas Hartney, E.A. not only has very reasonable fees but more importantly provides a value of service
that is unprecedented in the field of tax representation. Feel free to email Nick at nick
IRS Update on how to Appeal a Denied Offer in Compromise (November 2010)
Offer in Compromise (OIC) Disagreed Items
In preparing a request for an appeal, compile a list of specific with which items you do not agree and include a statement explaining why you disagree with each item. Consider using Form 13711 in the preparation of your appeal. You may also find a review of the following beneficial:
The Asset/Equity (AET) and Income/Expense (EIT) Tables that accompanied the OIC denial letter;
Your Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals;
the supporting documentation submitted with the Form 433-A; and
Publication 1854: How to Prepare a Collection Information Statement.
Check your figures and calculations again and verify the documents you submitted to Collection. If you do not have your completed Form 433-A available, refer to a blank Form 433-A.
The Monthly Income/Expense Statement (see Section 4, Page 4) requires you to provide the following:
Proof (i.e. pay stubs and earnings statements) of gross earnings and deductions for the past three months from each of your employers;
Proof of pension, social security and/or other income for the past three months;
Current statement(s) from the lender on your automobile(s), including the monthly payment and balance due for each vehicle;
Current statement(s) from all lien holders on your residence, including the amount of the monthly payment and balance due for each lien;
A copy of your last filed Form 1040 with all schedules, and
Proof of current expenses paid for the past three months including utilities, rent, insurance, property tax, non-business transportation expense (i.e. car payments, lease payments, fuel, oil, insurance, registration, parking), healthcare (including insurance premiums co-payments, other out-of-pocket expenses) and court-ordered payments.
Note: The amounts used on the "Monthly Income/Expense Statement" of Form 433-A could be different than the amounts used on the IET worksheet for food, clothing, miscellaneous, transportation, housing and utilities, out-of-pocket healthcare and other expenses. Collection Financial Standards are used to help determine a taxpayer's ability to pay a tax debt. All standards, except miscellaneous, are derived from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey (CES). These financial standards are explained below:
National standard expense allowed for food, clothing and miscellaneous monthly expense. The standard amount is computed based upon your income and family size instead of actual expenses.
National standard expense allowed for out-of-pocket healthcare expenses including medical services, prescription drugs, medical supplies (i.e. eyeglasses, contact lenses, etc.). This amount is based on Medical Expense Expenditure Panel Survey data and is in addition to the amount paid for health insurance.
Housing and utilities expense allowed for housing and utilities monthly expense. The standard amount is computed based upon the state and county where you reside and your family size.
Transportation expense allowed for monthly transportation expenses. The standard amount is computed by combining the standard for ownership cost and operating cost. This is based on the number of vehicles you own and the region you live.
Did you compute the amounts in accordance with instructions? Review the instructions in the following sections on Form 433-A:
Section 4, Items
Section 4, Items 14-15: Available Credit and Life Insurance
Section 4, Items 17-19: Personal Asset and Liability
Section 5: Self-Employed
Note: Certain assets such as vehicles, and real estate should be valued at the quick sale value. This is the amount you can sell the asset today. You may compute the value of a vehicle by consulting a trade association guide for the fair market value (FMV) and discounting the value by 20%. You may compute the value of real estate by an appraisal, the replacement cost value on your residence and possibly the taxable value of your home.
Did you provide the required attachments? See the bottom of page 4 of Form 433-A for "Attachments Required for Wage Earners and Self-Employed Individuals."
Update May 2011 IRS Collection Activity Reports Discouraging
Offer in Compromise acceptance rate per the 2010 IRS Data Book remains at under 25%. In the midst of the second greatest economic downturn in the history of the United States the Internal Revenue Service received over 57,000 Offer in Compromises submitted by taxpayers across the country. Of the 57,000 plus Offers that were submitted only 13,866 were approved.
In a time when the unemployment rate hovers around 9% (The official unemployment index, based on a monthly survey of sample households, counts only people who reported looking for work in the past four weeks. It doesn't account for part-time workers who want to work more hours but can't, given the tight job market. And it doesn't include those who have given up trying to find work. When the underemployed and the discouraged are added to the numbers, the unemployment rate rises to 16.6%) one would think that the IRS would be more lenient in accepting these Offers.
Rather than cutting back on expenses the IRS continues to gouge taxpayers with ridiculous amounts of penalty and interest (penalties up to 50% of the tax plus a never ending amount of daily compounded interest) and offers taxpayers much too little relief. Forgot about those snake oil commercials you see on television or solicitations you receive from cold calling telemarketers after you had a federal tax lien placed on you, the Offer in Compromise program is only works for the few.
It is not that Offer in Compromises can not be done but it is very important to set your expectations low when submitting one. In my opinion it does not hurt to ask and if you your offer is denied you can always work out another agreement such as a payment plan (installment agreement) or enter into currently not collectible status.
For more information give me a call toll free at 833-US-ExPat or 720-453-2795 ext. 777 local or shoot me an email at nick@genesistaxconsultants.com
The following text is taken directly from Form 656B-IRS Instruction Booklet:
WHAT YOU NEED TO KNOW
What is an offer?
An offer in compromise (offer) is an agreement between you (the taxpayer) and the IRS that settles a tax debt for less than the full amount owed. The offer program provides eligible taxpayers with a path toward paying off their debt and getting a “fresh start.” The ultimate goal is a compromise that suits the best interest of both the taxpayer and the IRS. To be considered, generally you must make an appropriate offer based on what the IRS considers your true ability to pay.
Submitting an offer application does not ensure that the IRS will accept your offer. It begins a process of evaluation and verification by the IRS, taking into consideration any special circumstances that might affect your ability to pay. Generally, the IRS will not accept an offer if you can pay your tax debt in full via an installment agreement or a lump sum.
This booklet will lead you through a series of steps to help you calculate an appropriate offer based on your assets, income, expenses, and future earning potential. The application requires you to describe your financial situation in detail, so before you begin, make sure you have the necessary information and documentation.
Are you eligible?
Before you submit your offer, you must (1) file all tax returns you are legally required to file, (2) make all estimated tax payments for the current year, and (3) make all required federal tax deposits for the current quarter if you are a business owner with employees.
Bankruptcy
If you or your business is currently in an open bankruptcy proceeding, you are not eligible to apply for an offer. Any resolution of your outstanding tax debts generally must take place within the context of your bankruptcy proceeding.
If you are not sure of your bankruptcy status, contact the Centralized Insolvency Operation at 1-800-913-9358. Be prepared to provide your bankruptcy case number and/or Taxpayer Identification Number.
Doubt as to Liability
If you have a legitimate doubt that you owe part or all of the tax debt, you will need to complete a Form 656-L Offer in Compromise (Doubt as to Liability). The Form 656-L is not included as part of this package. To submit a Doubt as to Liability offer, you may request a form by calling the toll free number 1-800-829-1040, by visiting a local IRS office, or at www.irs.gov.
Other important facts
Penalties and interest will continue to accrue during the offer evaluation process.
You cannot submit an offer that is only for a tax year or tax period that has not been assessed.
The law requires the IRS to make certain information from accepted offers available for public inspection and review. These public inspection files are located in designated IRS Area Offices.
A Notice of Federal Tax Lien (lien) gives the IRS a legal claim to your property as security for payment of your tax debt. Generally, if a lien is not already filed, a lien will not be filed during the offer evaluation process. If a lien was filed, it will normally not be released until the payment terms of the accepted offer are satisfied, or the tax debt is paid in full, whichever comes first.
If your business owes trust fund taxes, and responsible individuals may be held liable for the trust fund portion of the tax, you are not eligible to submit an offer unless you pay the trust fund portion of your tax debt first. Trust fund taxes are the money withheld from an employee’s wages, such as income tax, Social Security, and Medicare taxes.
The IRS will keep any refund, including interest, for tax periods extending through the calendar year that the IRS accepts the offer. For example, if your offer is accepted in 2011 and you file your 2011 Form 1040 showing a refund, IRS will apply your refund to your tax debt.
The IRS may keep any proceeds from a levy served prior to you submitting an offer. The IRS may levy your assets up to the time that the IRS official signs and accepts your offer as pending. If your assets are levied after your offer is pending, immediately contact the IRS person whose name and phone number are listed on the levy.
If you currently have an approved installment agreement with IRS and are making installment payments, then you may stop making those installment agreement payments when you submit an offer. This will allow you to make your offer payments noted below. If your offer is returned for any reason, your installment agreement with IRS will be reinstated with no additional fee.
PAYING FOR YOUR OFFER
Application fee
All offers require a $150 application fee.
EXCEPTION: If you are submitting an individual offer and meet the Low Income Certification guidelines (see page 2 of Form 656, Offer in Compromise), you will not be required to send the application fee.
Payment options
Submitting an offer requires the selection of a payment option as well as sending an initial payment with your application. The amount of the initial payment and subsequent payments will depend on the total amount of your offer and which of the following payment options you choose.
Payment option 1: This option requires 20% of the total offer amount to be paid with the offer and the remaining balance paid in five or fewer payments.
Payment option 2: This option requires the first payment with the offer and the remaining balance paid in accordance with your proposed offer terms. Under this option, you must continue to make all subsequent payments while the IRS is evaluating your offer. Failure to make these payments will cause your offer to be returned.
The length of the payment option you choose may affect the amount of the offer we will accept. Generally, an offer paid within five months of acceptance will require a lesser amount. Your offer amount cannot include a refund we owe you.
If you meet the Low Income Certification guidelines, you will not be required to send the initial payment, or make the monthly payments during the evaluation of your offer but you will still need to choose one of the payment options.
If your offer is returned or not accepted, any required payment(s) made with the filing of your offer and thereafter, will not be refunded. Your payment(s) will be applied to your tax debt.
If you do not have sufficient cash to pay for your offer, you may need to consider borrowing money from a bank, friends, and/or family. Other options may include borrowing against or selling other assets. NOTE: If retirement savings from an IRA or 401k plan are cashed out, there will be future tax liabilities owed as a result. Contact the IRS or your tax adviser before taking this action.
Future tax obligations
If your offer is accepted, you must continue to timely file and pay your tax obligations. If you fail to file and pay your required tax returns, before your offer is paid in full, or for five years after your offer is accepted, which ever is longer, your offer may be defaulted. If your offer is defaulted, all compro-mised tax debts will be reinstated.
HOW TO APPLY
Application process
The application involves filling out Form 433-A (OIC), Collection Informa-tion Statement for Wage Earners and Self-Employed Individuals and/or Form 433-B (OIC), Collection Information Statement for Businesses, filling out a Form 656, (Offer in Compromise), attaching an initial payment, and attaching a $150 application fee for each offer you send in.
If you and your spouse owe joint and separate tax debts
If you have joint tax debt(s) with your spouse and also have an individual tax debt(s), you and your spouse will send in one Form 656 with all of the joint tax debt(s) and a second Form 656 with your individual tax debt(s), for a total of two Forms 656.
If you and your spouse have joint tax debt(s) and you are also each responsible for an individual tax debt(s), you will each need to send in a separate Form 656. You will complete one Form 656 for yourself listing all your joint and separate tax debts and your spouse will complete one Form 656 listing all his or her joint and individual tax debts, for a total of two Forms 656.
If you and your spouse/ex-spouse has a joint tax debt and your spouse/ex-spouse does not want to submit a Form 656, you on your own may submit a Form 656 to compromise the joint debt.
Each Form 656 will require the $150 application fee and initial down payment unless your household meets the Low Income Certification guide-lines (See page 2 of Form 656, Offer in Compromise).
COMPLETING THE APPLICATION PACKAGE
To calculate an offer amount, you will need to gather information about your financial situation, including cash, investments, available credit, assets, income, and debt. You will also need to gather information about your average gross monthly household income and expenses. The entire household includes spouse, significant other, children, and others that reside in the household. This is necessary for the IRS to accurately evaluate your offer. In general, the IRS will not accept expenses for tuition for private schools, college expenses, charitable contributions, credit card payments, and other unsecured debt payments as part of the expenses calculation.
Step 1 – Gather your information
Step 2 – Fill out the Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals)
Step 3 – Fill out Form 433-B(OIC), Collection Information Statement for Businesses
Step 4 – Attach required documentation
Step 5 – Fill out Form 656, Offer in Compromise
Step 6 – Include initial payment and $150 application fee
Step 7 – Mail the application pack-age
Fill out the Form 433-A(OIC) if you are an individual wage earner and/or a self-employed individual. This will be used to calculate an appropriate offer amount based on your assets, income, expenses, and future earning potential. You will have the opportunity to provide a written explanation of any special circumstances that affect your financial situation.
Fill out the Form 433-B(OIC) if your business is a Corporation, Partnership, Limited Liability Company (LLC) classified as a corporation, single member LLC, or other multi-owner/multi-member LLC. This will be used to calcu-late an appropriate offer amount based on your business assets, income, expenses, and future earning potential. If you have assets that are used to produce income (for example, a tow truck used in your business for towing vehicles), you may be allowed to exempt the equity in these assets.
You will need to attach supporting documentation with Form(s) 433-A(OIC) and 433-B(OIC). A list of the documents required will be found at the end of each form. Include copies of all required attachments, as needed. Do not send original documents.
Fill out Form 656. The Form 656 identifies the tax years and type of tax you would like to compromise. It also identifies your offer amount and the payment terms.
The Low Income Certification guidelines are included on Form 656. If you are an individual and meet the guidelines, check the Low Income Certification box in Section 4, on Form 656.
Include a check, cashier’s check, or money order for your initial payment based on the payment option you selected (20% of offer amount or first month’s installment).
Include a separate check, cashier’s check, or money order for the application fee ($150).
Make both payments payable to the “United States Treasury.”
If you meet the Low Income Certification guidelines, the initial payment and
application fee are not required.
Make a copy of your application package and keep it for your records.
Mail the application package to the appropriate IRS facility. See page 23 for details, Application Checklist.
IMPORTANT INFORMATION
After you mail your application, continue to:
File all federal tax returns you are legally required to file.
Make all federal estimated tax payments and tax deposits that are due for current taxes.
Reply to IRS requests for additional information within the time frame specified. Failure to reply timely to requests for additional information could result in the return of your offer without appeal rights.