Home Offer in Compromise Video Series About Us Contact Us

Tax Attorney in New York Specializing in Offers in Compromise – Using Form 656

Section 7122 of the Internal Revenue Code gives the Internal Revenue Servicer the authority to compromise any civil or criminal case arising under the internal revenue laws, prior to the referral of that case to the Department of Justice . An offer to compromise may be accepted if there is doubt as to liability, if there is doubt as to collectibility, or if acceptance will promote effective tax administration. 26 CFR 301.7122-1(b)  Before accepting an offer to compromise, the IRS must examine the taxpayer’s financial position to determine whether such a compromise is appropriate unless it is an offer under section 7122(d)(3)(B) (regarding offers relating only to issues of liability). Once the IRS accepts an offer to compromise, the IRS must process the payments and monitor compliance. When the IRS accepts an offer to compromise, the taxpayer receives the benefit of resolving its tax liabilities for a compromised amount, provided the taxpayer complies with the terms of the compromise agreement. Further, section 6331(k)(1) of the Code generally prohibits the IRS from levying to collect taxes while a request to enter into an offer to compromise is pending, and if rejected for 30 days thereafter, and, if a timely appeal of a rejection is filed, for the duration of the appeal.

The IRS required an offer-in-compromise to be filed on Form 656 http://www.irs.gov/pub/irs-pdf/f656.pdf.

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer's tax liabilities for less than the full amount owed. If the liabilities can be fully paid through an installment agreement or other means, the taxpayer will in most cases not be eligible for an OIC. In order to be eligible for an OIC, the taxpayer must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.

In most cases, the IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (the RCP). The RCP is how the IRS measures the taxpayer's ability to pay. The RCP includes the value that can be realized from the taxpayer's assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.

IRS Specialists & Tax Lawyer in NYC

The IRS may accept an OIC based on three grounds.

  • First, acceptance is permitted if there is doubt as to liability. This ground is only met when genuine doubt exists under applicable law that the IRS has correctly determined the amount owed.
  • Second, acceptance is permitted if there is doubt that the amount owed is fully collectible. This means that doubt as to collectibility exists in any case where the taxpayer's assets and income are less than the full amount of the tax liability.
  • Third, acceptance is permitted based on effective tax administration. An offer may be accepted based on effective tax administration when there is no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.

When submitting an OIC based on doubt as to collectibility or based on effective tax administration taxpayers must use the most current version of Form 656, Offer in Compromise, and also submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individualshttp://www.irs.gov/pub/irs-pdf/f433a.pdf

An OIC for businesses is filed on Form 433-B, Collection Information Statement for Businesses  http://www.irs.gov/pub/irs-pdf/f433boi.pdf

A taxpayer submitting an OIC based on doubt as to liability must file a Form 656-L, Offer in Compromise (Doubt as to Liability) http://www.irs.gov/pub/irs-pdf/f656l.pdf.

In general, a taxpayer must submit a $150 application fee with the Form 656. The $150 application will be increased to $186 in 2014.  Do not combine this fee with any other tax payments. There are, however, two exceptions to this requirement.

  • First, no application fee is required if the OIC is based on doubt as to liability.
  • Second, the fee is not required if the taxpayer is an individual (not a corporation, partnership, or other entity) who qualifies for the low-income exception. This exception applies if the taxpayer's total monthly income falls at or below 250 percent of the poverty guidelines published by the Department of Health and Human Services. Section 4 of Form 656 contains the Low Income Certification guidelines to assist taxpayers in determining whether they qualify for the low-income exception. A taxpayer who claims the low-income exception must complete section 4 of Form 656.

Taxpayers may choose to pay the offer amount in a lump sum or in installment payments. A "lump sum offer" is defined as an offer payable in 5 or fewer installments and within 24 months after the offer is accepted. If a taxpayer submits a lump sum offer, the taxpayer must include with the Form 656 a nonrefundable payment equal to 20 percent of the offer amount. This payment is required in addition to the $150 application fee. The 20 percent amount is called "nonrefundable" because it cannot be returned to the taxpayer even if the offer is rejected or returned to the taxpayer without acceptance. The 20 percent amount will be applied to the taxpayer's tax liability. The taxpayer has a right to specify the particular tax liability to which the IRS will apply the 20 percent amount.

The offer is called a "periodic payment offer" under the tax law if it is payable in 6 or more monthly installments and within 24 months after the offer is accepted. When submitting a periodic payment offer, the taxpayer must include the first proposed installment payment along with the Form 656. This payment is required in addition to the $150 application fee. This amount is nonrefundable, just like the 20 percent payment required for a lump sum offer. Also, while the IRS is evaluating a periodic payment offer, the taxpayer must continue to make the installment payments provided for under the terms of the offer. These amounts are also nonrefundable. These amounts are applied to the tax liabilities and the taxpayer has a right to specify the particular tax liabilities to which the periodic payments will be applied.

Ordinarily, the statutory time within which the IRS may engage in collection activities is suspended during the period that the OIC is under consideration and is further suspended if the OIC is rejected by the IRS and where the taxpayer appeals the rejection to the IRS Office of Appeals within 30 days from the date of the notice of rejection.

If the IRS accepts the taxpayer's offer, the IRS expects that the taxpayer will have no further delinquencies and will fully comply with the tax laws. If the taxpayer does not abide by all the terms and conditions of the OIC, the IRS may determine that the OIC is in default. For doubt as to collectibility and effective tax administration OICs, the terms and conditions include a requirement that the taxpayer timely file all tax returns and timely pay all taxes for 5 years from the date of acceptance of the OIC. When an OIC is declared to be in default, the agreement is no longer in effect and the IRS may then collect the amounts originally owed, plus interest and penalties. Additionally, any refunds due within the calendar year in which the offer is accepted will be applied to the tax debt.

If the IRS rejects an OIC, then the taxpayer will be notified by mail. The letter will explain the reason that the IRS rejected the offer and will provide detailed instructions on how the taxpayer may appeal the decision to the IRS Office of Appeals. The appeal must be made within 30 days from the date of the letter. In some cases, an OIC is returned to the taxpayer, rather than rejected, because the taxpayer has not submitted necessary information, has filed for bankruptcy, has failed to include a required application fee or nonrefundable payment with the offer, or has failed to file tax returns or pay current tax liabilities while the offer is under consideration. A return is different from a rejection because there is no right to appeal the IRS's decision to return the offer.

Additional information about the OIC program can be found in Publication 594 http://www.irs.gov/pub/irs-pdf/p594.pdf

Bottom Table Layout Image - No content
Bigger Better Business A+ Rated - View Our Profile