Offer in Compromise IRS Tax Settlement 

An Internal Revenue Service Offer in Compromise (OIC) also known as an IRS Tax Settlement is a contractual agreement between a taxpayer and the IRS where both agree to settle a tax liability for less than what is owing. This type of agreement is authorized by Congress though Internal Revenue Code Section 7122. Although Offers in Compromise have been around for some time, the IRS did not begin actively soliciting them until 1992. 

 In 2009 which are the latest Offer in Compromise statistics published by the IRS, only 21% of all OIC's submitted were accepted. Submitting and processing an IRS tax settlement is not a quick process. According to the latest statistics the average Offer took 380 days to process from start to finish. The reason for this is that the Internal Revenue Service completes an extensive financial investigation before in comes to a recommendation.

At the beginning of 2011 the IRS commissioner announced a new Streamlined Offer in Compromise Program for certain taxpayers who qualify. Faster processing of the offer through fewer document and information requests and more leeway in approving an OIC are some of the benefits of the new program.

Although a person may prepare and submit their own IRS tax settlement, it is highly advisable to hire a tax attorney or other experienced tax professional.  The reason is that Offers in Compromise are complex and one simple mistake can result in a rejection and unnecessarily extended the time period you owe the tax.

Before a person can submit an Offer in Compromise, they must be in complete compliance with all tax return filing requirements as well as having made all required tax payments such as estimated tax payments. Also an OIC cannot be submitted while in a bankruptcy.

  There are basically three types of IRS tax settlements that a person can submit. 

 Doubt as to Collectability is an Offer in Compromise where the IRS determines that they will settle the outstanding tax liability for an amount slightly in excess of what they could collect from both voluntary and involuntary means. This is by far the most common type of Offer in Compromise submitted. The IRS will look at the fair market value of the taxpayer's assets as well as monthly income and expenses to compute what they call the "future income value." 

 For example if a taxpayer has assets valued at $50,000 and the IRS computes a future income value of $25,000 the IRS would accept a tax settlement of $75,001. That is of course assuming that the tax debt is over $75,001. 

A Doubt as to liability Offer in Compromise is when a taxpayer requests a reduction of the tax liability because they feel that they do not owe it. This type of OIC is not commonly submitted.

The third type of OIC is the Effective Tax Administration Offer in Compromise. This type of offer will be considered when the full collection of the tax would go against public policy or create an economic hardship.

Offer in Compromise applications are submitted using the Form 656 package which also contains Forms 433-A and B (OIC) as discussed below. 

For the Doubt as to Collectability and the Effective Tax Administration OIC, the IRS will conduct an extensive financial investigation. The taxpayer will have to complete Form 433-A (OIC) Collection Information Statement for Wage Earners and Self Employed Individuals.

This form requires the OIC applicant to list all bank and retirement accounts as well as all vehicles, real estate and any other significant assets such as boats, RV's, valuable artwork etc. There is also a section for the taxpayer's monthly income and expenses. This is the section that is used to compute the future income component of the IRS Tax Settlement.

  For certain personal living expenses, the IRS only allows a set amount based on the beauru of labor statistics. These are called the National Standard Expenses and cover food, clothing and other miscellaneous items. The amounts allowed are based on the number of persons in the family. There are also national standard expenses for out of pocket healthcare. 

In addition, there are local standards for Housing and Utilities and transportation expenses. These amounts are based on the average expenses in the counties where the taxpayer lives.

For taxpayers that operate a business as a sole proprietorship, Form 433-A (OIC) has an equivalent section for business assets and income and expenses. 

Form 433-B (OIC) is for businesses operating as a partnership, corporation or LLC and consists of the same sections for assets, income and expenses.

There are 2 Offer in Compromise payment options. The first allows full payment in five months or less and uses a more generous computation in calculating the amount that will be accepted for the OIC. The taxpayer must also submit a down payment of 20% of the amount offered.

The second allows full payment within twenty four months from the time the Internal Revenue Service receives the OIC application. A person submitting one of these settlements is required to make the monthly payments while the offer is being investigated.

 Both the 20% down payment and the monthly payments will be applied to the outstanding tax liability if the Offer in Compromise is not accepted. There is also a $150 processing fee that has to be submitted with the Tax Settlement Package unless the taxpayer qualifies for the low income exception.

 If the OIC is accepted the taxpayer must remain in filing compliance for 5 years after the offer is accepted or paid in full, whichever is longer.

 Offer in Compromie Introduction