IRS Offer in Compromise
An Offer in Compromise is also known as the “Pennies on the Dollar” with the IRS. It’s one way (but not the only way) to reduce your tax bill. Check out some of our recent resolutions that our team has successfully negotiated for taxpayers like you:
- Negotiated a penalty abatement for a taxpayer in Rancho Dominquez, CA in the amount of $230,927, resulting in a balance due of only $39.16!
- Obtained a Currently Not Collectible status for a client in Carlsbad, CA, temporarily closing collections on a liability of $43,840.
- Negotiated a 100% penalty abatement for a childcare company in North Carolina, saving the client over $19,000.
- We were successful in negotiation an Offer In Compromise for a client in Hamden, CT resulting in a savings of over $13,000.
- Secured a 50%reduction in personal assessment for a client in Glendale, AZ resulting in a savings of over $55,000.
- Successfully negotiated an Offer in Compromise for a client in Virginia that was an 87% savings. The client will only pay $32,280 to the IRS while saving over $219,000!
Priority One: Ensuring our Clients Pay the Least Amount Possible under the Tax Code
Can I Really Pay the IRS Less than I Owe?
As the above examples show, it is possible. It is, however, crucial that you understand that the IRS accepts less than it’s owed in a minority of cases. So, do not stop paying you taxes because you think the IRS will give you a break down the road!
Honestly, there are so many factors to consider if you should attempt submitting and Offer in Compromise that you should have a quick conversation with one of our tax relief experts. Below you can read more about the Offer in Compromise.
What is an Offer in Compromise?
An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed. Absent special circumstances, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. This is often advertised as the “Pennies on the Dollar” program. The truth is, few people qualify, and even fewer are successful
in properly preparing the complex OIC proposal for the IRS unless they have the help of an experienced tax resolution specialist.
In most cases, the IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer’s ability to pay and includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.
The IRS is not bound by either the offer amount or the terms proposed by the taxpayer. The OIC investigator may negotiate a different offer amount and terms, when appropriate. The investigator may determine that the proposed offer amount is too low or the payment terms are too protracted to recommend acceptance. In this situation, the OIC investigator may advise the taxpayer as to what larger amount or different terms would likely be recommended for acceptance.
Three Types of OICs
The IRS may accept an offer in compromise based on three grounds:
1. Doubt as to Collectibility – Doubt exists that the taxpayer could ever pay the full amount of tax liability owed within the remainder of the statutory period for collection.
Example: A taxpayer owes $20,000 for unpaid tax liabilities and agrees that the tax she owes is correct. The taxpayer’s monthly income does not meet her necessary living expenses. She does not own any real property and does not have the ability to fully pay the liability now or through monthly installment payments.
2. Doubt as to Liability – A legitimate doubt exists that the assessed tax liability is correct. Possible reasons to submit a doubt as to liability offer include: (1) the examiner made a mistake interpreting the tax code, (2) the examiner failed to consider the taxpayer’s evidence or (3) the taxpayer has new evidence.
Example: The taxpayer was vice president of a corporation from 2005-2008. In 2009, the corporation accrued unpaid payroll taxes and the taxpayer was assessed a trust fund recovery penalty as a responsible party of the corporation. The taxpayer was no longer a corporate officer and had resigned from the corporation on 12/31/2008. Since the taxpayer had resigned prior to the payroll taxes accruing and was not contacted prior to the assessment, there is legitimate doubt that the assessed tax liability is correct.
3. Effective Tax Administration – There is no doubt that the tax is correct and there is potential to collect the full amount of the tax owed, but an exceptional circumstance exists that would allow the IRS to consider an OIC. To be eligible for compromise on this basis, a taxpayer must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable.
Example: Mr. & Mrs. Taxpayer have assets sufficient to satisfy the tax liability and provide full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that Mr. and Mrs. Taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. There is no doubt that the tax is correct.
OIC Payment Options
In general, a taxpayer must submit a $150 application fee and initial payment along with the Form 656, Offer in Compromise. Taxpayers may chose to pay their offer in compromise in one of three payment options:
1. Lump Sum Cash Offer – Payable in non-refundable installments, the offer amount must be paid in five or fewer installments upon written notice of acceptance. A non-refundable payment of 20 percent of the offer amount along with the $150 application fee is due upon filing the Form 656.
If the offer will be paid in 5 or fewer installments in 5 months or less, the offer amount must include the realizable value of assets plus the amount that could be collected over 48 months of payments or the time remaining on the statute, whichever is less.
If the offer will be paid in 5 or fewer installments in more than 5 months and within 24 months, the offer amount must include the realizable value of assets plus the amount that could be collected over 60 months of payments, or the time remaining on the statute, whichever is less.
If the offer will be paid in 5 or fewer installments in more than 24 months, the offer amount must include the realizable value of assets plus the amount that could be collected over the time remaining on the statute.
2. Short Term Periodic Payment Offer – Payable in non-refundable installments; the offer amount must be paid within 24 months of the date the IRS received the offer. The first payment and the $150 application fee are due upon filing the Form 656. Regular payments must be made during the offer investigation.
The offer amount must include the realizable value of assets plus the total amount the IRS could collect over 60 months of payments or the remainder of the statutory period for collection, whichever is less.
3. Deferred Periodic Payment Offer – Payable in non-refundable installments; the offer amount must be paid over the remaining statutory period for collecting the tax. The first payment and the $150 application fee are due upon filing the Form 656. Regular payments must be made during the investigation.
The offer amount must include the realizable value of assets plus the total amount the IRS could collect through monthly payments during the remaining life of the statutory period for collection.
Payments and Application Fees
When filing an offer in compromise, two separate remittance documents should be sent, one for the application fee and the other for the required offer payment. All payments should be made by check or money order made payable to the United States Treasury..
The Form 656-PPV, Offer in Compromise Payment Voucher, included in the Form 656, should be completed and attached to any periodic payment(s) that becomes due. Failure to submit any required periodic payments, after the initial payment has been submitted, will result in the offer being declared withdrawn. For offers originally sent to Holtsville, NY, send payments to: P.O. Box 9011, Holtsville, NY 11742. For offers originally sent to Memphis, TN, send payments to: AMC Stop 880, P.O. Box 30834, Memphis, TN 38130-0634.
The OIC application fee reduces the assessed tax or other amounts due. The application fee will be returned if the OIC is deemed not to be processable. Unless the offer in compromise has been submitted under doubt as to liability or a completed Form 656-A is included with the Form 656, the $150 application fee must be included with the offer or the IRS will return the offer.
Further, you are required there after to make any payments on time and to stay current during and 5 years after the Offer in Compromise is paid in full.
Fraud and the IRS Offer in Compromise
There has been much fraud and controversy with the OIC program. Many companies do not understand it or willfully have applied on behalf of a client when the client was clearly not a candidate for an OIC. Hers is a news story from the IRS regarding this:
WASHINGTON — An enrolled agent was suspended from practice before the Internal Revenue Service by the Office of Professional Responsibility on April 6 for not performing services related to offers in compromise (OIC) paid for by taxpayers.
Enrolled Agent Richard Hargus worked in California for two separate, now defunct companies that specialized in tax resolution services, which included submitting OICs to the IRS.
Multiple taxpayers paid the companies for Hargus to resolve their income tax liabilities through the OIC program. In many instances, the taxpayers either did not receive the services for which they paid or received very little assistance with resolving their tax issues.
An offer in compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. Absent special circumstances, if a taxpayer has the ability to fully pay the tax liability in a lump sum or through installment agreement payments, an offer in compromise generally will not be accepted.
Following an investigation by the IRS, Hargus admitted a lack of due diligence in these taxpayers situations. The IRS suspended Hargus from practice for a period of time lasting at least 18 months.
The IRS is taking a closer look at tax resolution companies, and is also litigating known OIC abuses to ensure that tax professionals fulfill their legal and ethical obligations to their clients in dealing with IRS tax matters.