Offer in Compromise

IRS Offer in Compromise

The Internal Revenue Service (IRS) program known as offer in compromise has been around for a while, but many people still are not aware of it. The purpose of the program is to allow for a taxpayer and the IRS to reach a fair and equitable agreement that constitutes payment for the taxpayer's outstanding taxes, penalties, and interest, in an amount that is less that the full amount owed.

There are three primary cases when the IRS will likely accept an offer in compromise:

• When there is doubt regarding the liability of the taxpayer for the taxes, known as a doubt as to the liability case;
• When there is doubt as to whether the taxpayer will ever be able to pay their debt in full, known as a doubt as to collectability case; and
• When the taxpayer has proven that they are unable to pay the full amount due to exceptional circumstances, known as an effective tax administration case.

Before the IRS will consider an offer in compromise, the taxpayer must file all of their tax returns up through the current year. To apply for an offer in compromise, a taxpayer is required to complete IRS Form 656 and to include a $150 application fee. In addition, the initial payment must also accompany the application; there are three methods by which the payments can be calculated:

• A lump sum cash offer, which entails payment of the offer amount in five or fewer installments. Twenty percent of the total offer is due as the initial payment with this method.
• A short term periodic payment, which entails regular payments to pay off the total offer amount within a 24-month period. The first payment is due as the initial payment in this case.
• A deferred periodic payment offer, which entails installment payments that total to the full offer amount and are made over the remaining statutory time period for collection of the tax. The first payment is due as the initial payment with this method.

The offer in compromise is not intended to be a way that taxpayers can skirt the law and avoid paying their taxes. Instead, it is a measure of last resort after the taxpayer has exhausted all other possible ways to make arrangement for payment of taxes owed. In reality, the IRS accepts only a small percentage of the taxpayers that apply for the program.