What is an Offer in Compromise?
The IRS has a program known as an Offer in Compromise (OIC) which provides financially distressed taxpayers an opportunity to settle their tax debts, including interest and penalties, for a lump sum which is less than the total amount owed. Some tax resolution companies advertise this as if it is a brand new or limited time program. In fact, Offers in Compromise are right there in the 1954 version of the Internal Revenue Code. It is true, however, that over the years the IRS has, at least based upon its official guidelines, become more lenient. Nevertheless, except for cases where the taxpayer is truly and irreparably broke, it can be a lot of hard work to convince the IRS that an Offer in Compromise is the appropriate solution.
The amount of the Offer in Compromise will vary depending upon your income, assets, liabilities, and future income prospects. Current IRS guidelines allow for this lump sum to be paid in several installments over a period as long as two years, however, the total payments are higher for a lump sum Offer in Compromise. One fact which some tax resolution companies fail to properly explain to new clients it that if the entire amount of the tax, plus accrued interest and penalties can be paid over the remaining life of the collection statute of limitations, the IRS will not consider accepting the Offer in Compromise. This results in a very strange phenomenon. In some situations, the more you owe, the more likely it is that the IRS will accept an Offer in Compromise.
Our tax lawyers have found that the negotiation of an OIC is a lengthy process usually taking from 6 months to a year, but sometimes longer. If the IRS fails to reject or accept the Offer in Compromise during a two-year period, the OIC will be deemed to be accepted. During the time the OIC is pending, the IRS will not require any payments on old taxes. However, during the time an OIC is pending, you must pay all of your current taxes as they become due, including any quarterly estimated income tax payments and federal payroll tax deposits. If you fail to do so, the IRS will immediately reject your OIC and you will not be entitled to any appeal rights. Furthermore, your deposit, discussed below, will be applied to your taxes and if you wish to make a new OIC, you will need to make an additional deposit.
At the time the OIC is filed, a deposit must be submitted. The amount of the deposit is 20% of the amount offered for a "lump sum" Offer in Compromise. For a "periodic payment" Offer in Compromise, you must include the first proposed installment with the OIC. While a periodic payment OIC is being evaluated by the Service, you must make subsequent proposed installment payments as they become due. If the OIC is rejected, withdrawn, or returned, the IRS keeps any deposits made and applies them to the back taxes you owe. There is also a filing fee for Offers in Compromise. As of 2016, the filing fee was $186. However, it is expected to go up substantially.
If the OIC is accepted, you must timely file and pay all taxes (including any estimated taxes and federal tax deposits) for a period of five years following the acceptance of the OIC. If you breach this or any other term of the OIC, the IRS may immediately proceed against you to collect the entire amount of the original tax liability including interest and penalties, less any payments already received under the terms of the Offer in Compromise, with interest on the unpaid balance accruing from the date of default. An accepted OIC may also be revoked if the IRS determines that there has been a falsification of concealment of assets, or a mutual mistake of a material fact sufficient to cause a contract to be reformed or set aside. In the event your OIC is accepted, a record of the amount of the taxes due and the amount accepted will be available for public inspection for a period of one year at the local IRS office.
The mere act of submitting the Offer in Compromise will extend the time the IRS has to collect the overdue taxes from you for a period of one year, plus the time that the IRS is considering your OIC. Submitting the offer may also delay the earliest time in which you could discharge your taxes bankruptcy. Until the OIC is accepted, interest and penalties continue to accrue on the outstanding balance due. Any refunds owed to you by the Internal Revenue Service for tax years before the end of the calendar year during which the OIC is accepted will be kept by the IRS. Upon acceptance of the OIC, you will give up all rights to dispute the correctness of the tax for any of the years compromised.
The Internal Revenue Service is under no obligation to accept the Offer in Compromise. Although current IRS procedures discourage it, the IRS may require, as a condition of accepting the OIC, that you sign an agreement, sometimes referred to as a "collateral agreement," under which you would pay a percentage of your future income to liquidate the remaining balance on the debt. In no case would the total amount of these payments exceed your actual liability.