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Barron's International Tax Service

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Offer In Compromise

As the United States keeper of taxation, the Internal Revenue Service is in the business of assessing and collecting taxes.  Tax assessing evolves virtually every year as laws change and generally affect tax brackets, tax credits, and tax rates.  Once a tax liability has been determined usually through the medium of filing a tax return, most taxpayers dutifully send their payments by the annual due date.  For those filing personal income tax returns, the due date is 15 April. 

When a taxpayer does not pay his taxes on time, the IRS initiates its collection process.  This process begins with a bill accompanied by Publication 1 – Your Rights as a Taxpayer – and Publication 594 – Understanding the Collection Process. 

In circumstances where the debt cannot be liquidated, taxpayers should consider liquidating assets (before possible seizure) or applying for a loan.  Usually loan costs are less than the double barrel affect of interest and penalties assessed by IRS. If these steps do not satisfy, then the debtor should contact IRS as soon as possible.  The Service will then offer its client several alternatives:

            Extension of Time to Pay:  A short extension of time to pay up to 120 days.

            Installment Agreement:   Periodic payments directly from a bank account or payroll deduction.

            Delaying Collection:  Collection is delayed until taxpayer’s financial circumstances improve.

            Offer in Compromise (OIC):  Less than the full amount due is offered as a compromise.

Since an OIC holds the prospect of paying less, several criteria must be understood for its application.  The Service will generally accept an OIC when it determines that the full tax liability cannot be paid.  It may decide that the collection of the tax would cause an economic hardship.  Or doubt may exist as to the original amount being assessed. 

To determine eligibility for an OIC, three questions must be answered negatively:  1) Do you currently have an open bankruptcy proceeding?  2) Do you have any federal tax returns not filed?  3) If you are a business with employees, have you failed to timely make any required federal tax deposits?  Following responses to these questions, the OIC applicant must complete Form 656, which is the official compromise agreement.  A $150 application fee must accompany this Form.

After submission of the application and IRS evaluation, one of three payment plans may be proposed:  1) Cash to be paid within 90 days, 2) Short-term deferred payment up to 24 months, 3) Long-term deferred payment.  The IRS has provided a worksheet for calculating an offer amount. 

The writer remembers a client in 1990 who owned a tire store in Santa Fe and who owed back taxes to IRS.  She had negotiated an instalment payout of those taxes but then failed to follow through.  One morning an IRS agent arrived with the intention of closing the business.  The client was only able to avert this action by quickly obtaining a loan for the full amount of the taxes ($12,000).