IRS Offers in Compromise
The Ultimate Guide Including Tips, Advice and Planning.
When facing substantial federal tax liability as the result of an IRS audit, negotiating an offer in compromise can significantly reduce the amount you owe. Are you eligible for an IRS offer in compromise? Find out from our senior federal tax fraud defense lawyers.
As a U.S. taxpayer, your federal returns are subject to being audited by the Internal Revenue Service (IRS). If the IRS audits your returns and determines that you have not paid the full amount you owe, it can order the payment of back taxes, interest, and penalties, and it can utilize various collection methods to ensure that you pay—willingly or unwillingly.
But, what if you truly cannot afford to pay your outstanding debt to the U.S. Treasury? Or, what if paying what you owe would leave you destitute or lead to financial ruin? In these scenarios, it may be possible to negotiate an offer in compromise.
What is an IRS Offer in Compromise?
- Doubt as to Liability – “A compromise meets this criterion only when there’s a genuine dispute as to the existence or amount of the correct tax debt under the law.”
- Doubt as to Collectability – “Doubt as to [collectability] exists in any case where the taxpayer’s assets and income are less than the full amount of the tax liability.”
- Effective Tax Administration – “An offer may be accepted based on effective tax administration when there is no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.”
When evaluating an offer in compromise, the IRS looks at what the agency refers to as, “reasonable collection potential (RCP)”. In order for an offer in compromise to be deemed acceptable, it must generally propose payment of an amount that is “equal to or greater than” the RCP. In order to assess a taxpayer’s RCP, the IRS examines all tangible and intangible assets that are available to satisfy the taxpayer’s outstanding tax debt, as well as the taxpayer’s future income (“less certain amounts allowed for basic living expenses”).
If you have grounds to pursue an offer in compromise, and if you can demonstrate that your offer meets the threshold requirements for acceptance by the IRS, then it might make sense to propose an offer in compromise as a way to reduce your federal tax burden to a more-manageable level. However, having an offer in compromise accepted comes with certain strings attached; and, in certain circumstances, other outcomes may be more desirable. As a result, prior to proceeding with an offer in compromise, it is important to thoroughly evaluate your options with the help of an experienced federal tax fraud defense attorney.
How Does an IRS Offer in Compromise Work?
As its name suggests, an offer in compromise is an “offer” to the IRS. It is up to you to make an offer in compromise, and it is up to the IRS to determine whether your offer will be accepted. As a practical matter, however, offers in compromise often lead to negotiations (as long as the initial offer is reasonable), although it is also possible to have your offer rejected.
At Oberheiden P.C., we work closely with our clients to develop reasonable offers in compromise that adequately address our clients’ financial concerns while also satisfying the IRS’s approval criteria. We also help our clients evaluate the alternatives to submitting an offer in compromise, and we have extensive experience defending clients during and after IRS audits and investigations. If proposing an offer in compromise makes sense given your particular circumstances, our lawyers will prepare your offer, submit it to the IRS on your behalf, and work with the IRS as necessary to gain acceptance of your offer.
In addition to having justification for your officer and being prepared to demonstrate that your offer meets or exceeds the IRS’s RCP, there are various other requirements for submitting an offer in compromise as well. These requirements include:
- Submission of IRS Form 433-A (OIC) or IRS Form 433-B (OIC)
- Submission of all required supporting documentation
- Submission of IRS Form 656-B or IRS Form 656-L (depending on why you are seeking an offer in compromise)
- Submission of the non-refundable application fee
- Submission of a non-refundable initial payment based on the amount of your offer (as contained in IRS Form 656-B or IRS Form 656-L)
- Not being party to a pending bankruptcy proceeding
- Not being delinquent on your current tax filing and payment obligations
Should You Submit an IRS Offer in Compromise?
In order to decide whether you should submit an offer in compromise to the IRS, it will be necessary to thoroughly evaluate all of the circumstances surrounding your outstanding federal tax debt. While submitting an offer in compromise can reduce the amount you owe (and will ultimately prove to be a desirable option for many taxpayers), it also involves accepting liability for failure to pay tax when due. If you disagree with the IRS’s assessment of your tax liability, then challenging the outcome of your audit may be a better option.
It is also important to keep in mind that when you submit your offer, there is no guarantee that the IRS will entertain it. If IRS agents believe they have evidence to suggest that you have committed federal tax fraud (and intentional federal tax fraud in particular), there is nothing that stops them from using the information you submit with your offer to pursue charges. As a result, submitting an offer in compromise requires a careful and strategic approach, and it requires a realistic assessment of your potential exposure to federal tax fraud or tax evasion charges.
FAQs: What Do You Need to Know Before You Submit an IRS Offers in Compromise?
Q: How much are you required to pay when you submit an offer in compromise to the IRS?
When submitting an offer in compromise to the IRS, you are required to pay a $205 application fee (as of 2020) plus an initial installment on the amount of your offer. This installment can be either (i) 20 percent of the total offer amount, or (ii) the first of a series of periodic payments to be made over the course of six to 24 months. If you are submitting multiple offers (i.e. in your individual capacity and on behalf of a closely-held business that you own), you must pay an application fee and initial installment for each application.
Q: Can both individuals and businesses submit offers in compromise?
Yes, the IRS’s offer in compromise program is available to both individuals and businesses. If you are submitting an offer in your individual capacity, you must use IRS Form 433-A (OIC). If you are submitting an offer in compromise on behalf of a business that you own, you must use IRS Form 433-B (OIC). Each form has slightly different requirements, and each offer must be tailored to the specific debtor’s (i.e. your or your business’s) outstanding tax liability.
Q: What happens if I don’t pay after negotiating an offer in compromise with the IRS?
If you do not pay the required installment with your offer in compromise, then the IRS will deny your application. If you make the initial payment but fail to make any subsequent payments, then the acceptance of your offer in compromise will be rescinded, and the IRS will have the ability to utilize all of the various enforcement and collection mechanisms that it has at its disposal. You could also face the risk of a federal tax fraud or tax evasion investigation.
Q: What happens if the IRS rejects my offer in compromise?
If the IRS rejects your offer in compromise, you have the right to file an appeal. You will receive a letter explaining why your offer was rejected, and the date of the letter will start the 30-day time window for submitting your appeal to the IRS Office of Appeals. If your offer is “returned” rather than “rejected,” you may be able to continue pursuing your offer in compromise depending upon the reason for the return.
Q: Do I need an attorney to help me submit an IRS offer in compromise?
As an individual taxpayer, you are not required to hire an attorney to deal with the IRS on your behalf (if you are a business owner, you must hire an attorney to represent your business in any legal matters). With that being said, if you are considering an offer in compromise, it is strongly in your best interests to speak with an attorney before submitting any information to the IRS. Once you submit information to the IRS, you cannot take it back; and, if you make mistakes in dealing with the IRS, the financial consequences could be substantial.
Request a Free Consultation with a Senior Federal Tax Fraud Defense Attorney at Oberheiden P.C.
Do you have questions about submitting an IRS offer in compromise? If so, one of our senior federal tax fraud defense lawyers will be happy to go over your options in detail. To request a free consultation at Oberheiden P.C., call us at 888-680-1745 or inquire online today.