The minimum offer
amount must generally be equal to, or greater than, a taxpayer's
reasonable collection potential (RCP). The RCP is defined as the total
of the taxpayer's realizable value in real and personal assets, plus
future income.
The IRS may legally compromise for one of the following reasons: doubt
as to liability, when doubt exists that the assessed tax is correct;
doubt as to collectibility, when doubt exists that the taxpayer could
ever pay the full amount of tax owed; or effective tax administration.
Under effective tax administration, there is no doubt that the assessed
tax is correct and no doubt that the amount owed could be collected, but
the taxpayer has an economic hardship or other special circumstances
which may allow the IRS to accept less than the total balance due.
Effective 11/01/03, taxpayers must use the May 2001 version of Form 656
(PDF), "Offer– in–Compromise", and Form 433-A (PDF), "Collection
Information Statement for Wage Earners and Self-Employed Individuals",
and/or Form 433-B (PDF), "Collection Information Statement for
Businesses" when submitting an OIC."
Beginning November 1, 2003, a $150 application fee or Form 656-A (PDF),
"Income Certification for Offer in Compromise Application Fee" must be
submitted with the Form 656 (PDF). The $150 fee is required unless the
offer is based solely on doubt as to liability, or the taxpayer’s total
monthly income falls at or below income levels based on the Department
of Health and Human Services poverty guidelines. Taxpayers who claim the
poverty guideline exception must certify their eligibility using Form
656–A. The poverty guideline exception applies only to individuals.
Taxpayers requesting an OIC must have filed all required federal tax
returns. If in business, they must also have filed and paid any required
employment tax returns on time for the two quarters prior to filing the
OIC, and be current with deposits for the quarter in which the offer in
compromise was submitted. Taxpayers must also not be a debtor in a
bankruptcy case.
Taxpayers may choose to pay the offer amount in a lump sum, in monthly
payments over the remainder of the statutory time allowed for
collection, or a combination of a lump sum and monthly payments.
Generally, it is to the taxpayer’s advantage to pay the amount in the
shortest time possible because longer payment terms will require a
larger offer amount.
Ordinarily, the statutory time allowed for collection is suspended
during the period the OIC is under consideration, and is extended
further if the OIC is later submitted to the Appeals Office. If the IRS
grants a fresh start by accepting the OIC, it is expected the taxpayer
will have no further delinquencies. If taxpayers do not abide by all the
terms of the agreement -- including filing all future returns and making
all payments when required for 5 years or until the offered amount is
paid in full, whichever is longer -- their OIC may be declared in
default. If the IRS rejects the OIC, taxpayers will be notified by mail.
In the IRS letter, it will explain the reason for the rejection and
provide detailed instructions on how to appeal the decision.
Additional information about the Offer– in– Compromise can be found on
Form 656, and in Publication 594 (PDF), The
IRS Collection Process, or by
visiting IRS.gov Offers in Compromise Web page.
Related Articles:
Government Tax Lien
Tax Collection
Tax Payment Options
Offers In Compromise
