The Keys to Unlock a Successful Offer in Compromise ©
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 here.
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 on form to pull up the PDF file):
Form 433-A for wage earners and self-employed individuals (Form 1040 Schedule C)
Form 433-B for businesses (C-Corps., S-Corps, LLC, etc.)
IRS Form 656 for doubt as to collectibility and effective tax administration offers (eta offer)
Form 656-A to determine if you must pay the $150 application fee (for low income taxpayers)
Form 656-B Instruction Book
Form 656-L for doubt as to liability offers
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@genesistaxconsultants.com or directly at (720) 453-2775 ext. 777.
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 11-13: Cash on Hand, Personal Bank Accounts and Investments
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."