“IRS Issues New Optional Guidance On Processing Offers In Compromise in the Economic Downturn” by Frank C. Carnahan
An offer in compromise (“OIC”) is an agreement between the IRS and the taxpayer to settle a tax liability for less than full payment, and is authorized by Internal Revenue Code §7122. Tax obligations that can be compromised include any civil or criminal case, including interest and penalties. The regulations provide some guidance, but much is left to IRS discretion. The offer amount must equal or exceed taxpayer’s “reasonable collection potential”, and must exceed zero. The minimum offer amount based on “doubt as to collectability” is: 1) the net realizable value in assets (quick sale value reasonably expected from an asset, typically if sold 90 days or less), minus secured debt with priority over a filed IRS Notice of Federal Tax Lien (credits cards are unsecured debt and do not count), PLUS, 2) the present value (not actual monthly payments) of potential installment payments (based on income less “necessary living expenses” for 48 to 60 months, or the remainder of statute of limitation on collection if less). Actual installment payments are generally NOT part of the offer, which is typically “cash payment in full”.
The IRS Small Business/Self-Employed Division (SB/SE) recently released three interim optional guides recognizing how the current economic downturn impacts OICs:
- An additional review must be initiated before rejection of an OIC if the difference between taxpayer’s offer and IRS determined “reasonable collection potential” is solely attributable to a disagreement on real property equity.
- Taxpayers are not required to include a 20% payment or periodic payments to change an accepted offer. No specific form is required (e.g., Form 656), but the proposal must be in writing. IRS employees are to review updated financial information and supporting documents and negotiate based on taxpayer’s current financial situation, recognizing how quickly circumstances change in the current economy.
- Although IRS procedures require any OIC without Form 656-A, low income fee waiver, be returned as not processable, the OIC will be processed if the offer meets IRS Low Income Guidelines.