About 7 years ago, in 2012, the IRS lowered its restrictions on collection procedures and policies. Particularly, the Internal Revenue Service set up a “Fresh Start” initiative. Taxpayers who have a tax debt they cannot pay, may have heard that they can settle their tax debt for less than the amount owed. It’s called the Offer in Compromise.
On the television, on the radio, and in the newspaper; you have probably heard many companies offering their help to settle tax liabilities for pennies on the dollar. Are these offers REAL? Will they HELP a delinquent taxpayer?
There is no question that the Internal Revenue Service (IRS) has liberalized its collection policies and procedures. Specifically, the agency has established a “Fresh Start” initiative to permit qualified taxpayers a means to pay less taxes through the Offer in Compromise (O.I.C.) program. The IRS also allows installment arrangements of different types, for taxpayers who are not qualified for an O.I.C.
When an IRS assessment is due, the IRS collection process starts. Within 30 days, the taxpayer needs to address the lurking liability from the original assessment notice. Collection cases for tax liabilities that are below $125,000 are generally assigned to the automated collections system (ACS). However, certain tax collection cases are assigned to a local Revenue Officer, typically when the amount owed is above the ACS threshold, or if the taxpayer has an unfavorable collection history. It is pertinent to file a response to the taxpayer’s assessment notice(s) within the specified time given; otherwise, the taxpayer may lose certain rights.
The taxpayer has to FIRST be compliant with all filing requirements, in order to request a collection alternative, such as an O.I.C. or Installment Agreement. The taxpayer must also complete the pre-qualifier, located on the IRS website, prior to applying for an O.I.C. If it is determined that the taxpayer does qualify for an O.I.C., then they must submit a complete Financial Disclosure, i.e., Form 433-A (Individuals) or Form 433-B (Businesses), as well as an executed offer proposal on the Form 656. All back-up documentation, such as bank statements, recent pay-stub, mortgage statement, etc. must be included with the O.I.C. A filing fee of $186.00 is required and the taxpayer must make a payment for a percentage of the offer amount, unless they are low-income certified.
Any tax type is eligible for an O.I.C. It is not limited to personal income tax. Thus, business liabilities may also be settled.
The O.I.C. packet is screened by Agents for compliance, once received. If all of the required forms are filled out correctly, with the necessary backup documentation, the taxpayer is compliant with his/her filing requirements, the appropriate payments are made, then the case will be assigned to the O.I.C. unit for further consideration. Occasionally, the Agent might request additional information during the review stage, for backup. The O.I.C. department will issue the taxpayer and/or the taxpayer’s representative a letter, informing the taxpayer that the case has been received by that unit and will include a projected date in which it will be decided, once the initial review is complete. Typically, the collection process is stayed once the collection case is assigned to the O.I.C. unit for review.
The taxpayer must offer at least his/her Reasonable Collection Potential (RCP), i.e., the amount that the IRS could reasonably expect to collect by ordinary collection activities, in order for an Offer to be accepted. Based on the taxpayer’s financial disclosures, the back-up documentation and the Agent’s own research, the OIC Agent determines the RCP. Commonly, agents are directed to reject offer considerably below the taxpayer’s RCP unless “special circumstances” justify acceptance of such an offer. See Fairlamb v. Commissioner, T.C. Memo. 2010-22, slip op. at 11; Rev. Proc. 2003-71, sec. 4.02(2), 2003-2 C.B. 517, 517.
Special circumstances can be demonstrated by the taxpayer and is a case-based determination. When the taxpayer has the ability to full pay the tax liability, the O.I.C. unit requires legitimate documentation explaining said circumstances. The taxpayer’s age and lack of savings, the taxpayer’s health, etc., are some examples of special circumstances. If it is determined “that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship”, the IRS specifically provides for a compromise of a tax debt as defined in IRS Regulation Sec. 301.6343-1.
The O.I.C. analysis process is fairly simple and typically is decided from the documents submitted. The O.I.C. agent, also known as a Settlement Officer however, has discretion in considering supplementary factors when accepting an Offer. The actions and determinations of the Settlement Officer cannot be arbitrary or capricious, as should be noted.
Most O.I.C.’s are submitted because a taxpayer absolutely cannot fully pay his/her tax liability, but some O.I.C.s are submitted simply to postpone collection action. Certain collection cases are assigned to Revenue Officers, as mentioned earlier. The Revenue Officer, especially an aggressive one, may prevent the taxpayer’s O.I.C. from being accepted into the O.I.C. program for consideration. Although collection is stayed once the O.I.C. is filed, the Revenue Officer can accomplish this by informing the O.I.C. unit that the proposed Offer is simply to hinder collection and that the taxpayer has the ability to fully pay the liability. Under these circumstances, the O.I.C. unit will return the taxpayer’s O.I.C., without any further review and without any Appeal rights.
The Settlement Officer will accept an increased offer instead of denying the submission outright, if the Reasonable Collection Potential is more than what was offered. The taxpayer’s intent of any O.I.C. case is to establish the lowest RCP based on allowed expenses, to accomplish a fair settlement. Even if the taxpayer does not agree with the Settlement Officer’s decision, the alternatives should be considered carefully. An increased offer is usually always better than no offer at all.
This article is meant to be instructive as to the Offer in Compromise procedures and requirements. There are five other collection alternatives that can also be utilized by the taxpayers, of which all tax resolution practitioners should be cognizant of.
Fresh Start Offer In Compromise What to Expect