In a nutshell, an offer in compromise is a taxpayer’s offer made to compromise and settle a delinquent tax liability. The amount the IRS is willing to accept in settlement is the cash equivalent of what the IRS could collect by levy or other seizure of the taxpayer’s income and assets, over a certain period of time. The IRS refers to this as the taxpayer's realizable collection potential. The offer of settlement may be made on the ground that the taxpayer does not have the financial ability to pay the fullliability, or there is doubt about the taxpayer's legal liability to pay the claim, or where under the circumstances it would be unfair to force the taxpayer to pay the claim. Recent amendments to the key IRS Code section authorizing compromises have imposed some new requirements to the offer process.
Law IRC §7122: The new law contains the following requirements for submission of an OIC:
• The taxpayer must pay 20% of the OIC at the time a lump-sum OIC application is submitted to the IRS for approval. The term “lump-sum OIC” means any offer of payments made in five or fewer installments.
• The taxpayer must pay the first proposed installment at the time a periodic payment OIC application is submitted to the IRS for approval.
• The taxpayer must continue to make the proposed installments of a periodic payment OIC during the time period the OIC is being evaluated by the IRS for approval. Any failure to make an installment during this period may be considered a withdrawal of the OIC.
• The application of any payment made under the above rules with respect to the tax liability may be specified by the taxpayer.
• The tax liability which is the subject of the OIC is reduced by any user fee
imposed with respect to the OIC.
• The IRS may issue regulations waiving the required payment rules above in a manner consistent with the practices established under Section 7122(d)(3).
• Any OIC which does not meet these new requirements may be returned to
the taxpayer as unprocessable.
• Any OIC submitted will be deemed to be accepted by the IRS if the OIC is not rejected by the IRS within 24 months after the date the OIC was submitted.
These new rules are effective for OICs submitted on and after July 16, 2006.
KEY BENEFITS: An offer in Compromise deemed processable by the IRS halts levy and other tax collection seizures during the time the offer is under consideration. Where this remedy applies, it is a good way to get the taxpayer a fresh-start; the IRS accepts a presumably small amount of money and forgets the rest. In some cases it can be said this remedy literally settles a huge tax debt for “pennies on the dollar,” although settlements that good are rare. A caveat is that the taxpayer is on a kind of “probation” for 5 years following the acceptance of the offer, during which the taxpayer must file all tax returns timely and pay the taxes due. Default may result in retraction of the agreement and demand for full payment.