Offer In Compromise

Offer In Compromise



The Reform Act of 1998 restructured how Offers are reviewed and accepted. Originally, there were only three or four revenue officers in the Laguna Niguel district who could review Offers in Compromise. The 1998 Act moved the preliminary review of Offers to revenue officers assigned locally and “offer in compromise technicians” in Laguna Niguel for all offers in the Southern California District. The 2001 IRS Restructuring has moved preliminary review of all offers in the Western US to the Memphis, Tennessee Service Center: Memphis Internal Revenue Service Center COIC Unit PO Box 30803, AMC Memphis, TN 38130-0803 All offers in compromise in the Eastern US are reviewed in the Brookhaven, New York Service Center. This page will discuss offers submitted in the Western US – though the process is supposed to function the same throughout the US. The IRS plans to process thousands of offers in compromise through the Tennessee Service Center monthly. If at the time the offer is submitted the case is assigned to a revenue officer, the revenue officer reviews the documentation for completeness, checks IRS records for compliance with tax laws, and forwards it to Memphis. Once Memphis determines that the Offer in Compromise meets the mechanical IRS standards for acceptance the offer is sent to a field office that is “local” to the taxpayer to be “worked”. The technician in the field office requests and examines substantiation documents and, if the total tax due is less that $50,000, has the initial authority to accept, reject, or return the offer. Higher amount offers require higher approval authority. With the initial review procedure being handled locally or by offer in compromise technicians and the mandate to accept more being emphasized, more offers are being accepted. If documentation is not near perfect when submitted the IRS will “return” the offer. Returning the offer means that there is no right to appeal the “return” of the offer in compromise because it never will have been accepted into the system for review. In June 2012 the IRS changed its policy on how to calculate the Offer resulting in lower amounts required to satisfy the IRS guidelines on “acceptable” Offers.


OFFER IN COMPROMISE BASICS An offer in compromise can be submitted under one of two theories: Doubt as to Collectability or effective Tax Administration.

1. Doubt as to Collectability. If the offer in compromise is being submitted because the taxpayer cannot afford to pay the entire liability, the taxpayer provides proof to the IRS of the taxpayer’s inability to pay. (“I have insufficient assets and income to pay the full amount.”)

2. Effective Tax Administration. If the taxpayer has sufficient assets to pay the liability but doing so would cause a hardship, the taxpayer provides proof to the IRS of the potential hardship. (“I owe this amount and have sufficient assets to pay the full amount, but due to my exceptional circumstances, requiring full payment would cause an economic hardship that would be unfair and inequitable.”) In July 1999, the IRS widened its OIC program to cover taxpayers who would suffer economic hardship if they paid their entire tax debt. This type of offer is intended to be used for taxpayers on a fixed income such as Social Security or even some types of retirement accounts – even an IRA – where payment of taxes would wipe out funds to pay for medical treatment or basic necessities. Or where sale of assets would wipe out income required to meet personal living expenses. If accepted, the IRS would agree not to take the Social Security, the retirement account, or the assets and establishes “hardship” status. The rules of including value of such assets in the offered amount would appear to not apply.

REQUIRED FINANCIAL INFORMATION Form 433-A  – Financial Statement for Wage Earners and Self-Employed. Each section of the 433 A must be completed. If information is not applicable then so indicate with ‘N/A’. Assets should be listed at a quick sale or liquidation value. Motor vehicle low blue book value can be determined with a Kelly Blue Book ( Household goods and personal property should be valued at a “garage sale” or “swap meet” value. Real property should receive an evaluation by a qualified real estate professional. Monthly income and expense analysis. The most critical part of the 433 A is the monthly income and expense analysis. (Refer to IRS Collection Financial Standards attachment) Line 35 – Food, Clothing, and Misc. allowable amount is based on the number of persons in the household. This number is inalterable. If taxpayer’s actual expenses exceed the national standard expense, the taxpayer will only be allowed the national standard expense amount. Line 36 – Housing and Utility expenses are based on a local or area standard. The numbers indicated in the housing and utilities chart is the maximum allowable. The taxpayer is allowed the amount that can actually be proven or the maximum allowable figure, whichever is lower. To exceed the standard, there must be special circumstances which require more expensive utilities or more expensive housing, etc. Some justifications include special physical needs, special health considerations, etc. If actual housing is too high, the taxpayer will have up to a year to change housing to come within the standards. Line 37, 38, 39 – transportation, maximum is indicated by a local standard. Either the actual amount spent or the local standard, whichever is lower, is allowed. Line 41 – out of pocket health care costs are allowed without documentation @ $60 per person under age 65 and $144 per person 65 and older. If can establish higher, they can be allowed as long as they are reasonable health care expenses. Line 44 – life insurance must be justified by the tax payers age and insurability. IRS may insist that the policy be canceled if there is cash value or the monthly payment is unreasonably high. Line 46, debts that are not legally perfected or secured will be disallowed. Credit card payments, unsecured loan payments, payments to family members may all be disallowed. Offer in compromise technicians and revenue officers have some discretion here. Payments on an automobile are allowed according to the transportation standards on line 38. Other secured obligations that are legally perfected can be allowed if they are reasonable and necessary. Additional expenses that may be allowed if the taxpayer has a child in college, education expenses are allowed through the end of the semester. After the semester is ended, IRS will disallow any education expense for college.

FORM 433-B, COLLECTION INFORMATION STATEMENT FOR BUSINESSES. Form 433 B is required for any self-employed individual requesting an offer in compromise (or an installment agreement). As with the 433 A, the 433 B must be accurate and contain a response in each and every blank.

Substantiation. All expenses must be verified with independent documentation. Most revenue officers accept the past three to six months of bank statements, utility bills, insurance statements, etc. Other revenue officers require that you additionally provide copies of bank statements and canceled checks. There tends to be flexibility with business financial statements because there is no “standard allowance” which must be followed. Any reasonable justified business expense is generally allowed.

Expenses that are Not Generally Allowed. The IRS typically does not allow the taxpayer to claim tuition for private schools, public or private college expenses, charitable contributions, voluntary retirement contributions, payments or unsecured debts such as credit card bills, cable television charges and other similar expenses as necessary living expenses. However, the IRS can allow these expenses if the taxpayer can prove that they are necessary for the health and welfare of the taxpayer or the taxpayer’s family or for the production of income.

SUBSTANTIATION REQUIRED The offer must be accompanied by substantiation of expenses for the past 3 to 6 months. If not submitted with the offer, a demand letter with a very short deadline will be issued to the taxpayer (with a copy to the POA). With mailing time, preparation time, etc, in the way, it is sometimes tough to get the demanded documents there on time. If they are late, the offer gets “returned”.

THE PROCESSABLE OFFER If the IRS establishes through the review of the financial statement that the offer is “processable”, it will be sent on to the next step and be reviewed by a group manager, branch chief, or both, then to District Counsel (the legal department) to be reviewed for legal accuracy.

THE AMOUNT OF THE OFFER The offered amount must exceed the taxpayer’s net realizable equity in all assets plus net disposable income for 12 months (New as of June 2012).

Some Important IRS Definitions:

Realizable Value –-The quick sale value amount minus what you owe to a secured creditor. The creditor must have priority over a filed Notice of Federal Tax Lien before IRS will allow a subtraction from the asset’s value.

Fair Market Value –The amount you could reasonably expect from the sale of an asset. Taxpayer must provide an accurate valuation for each asset. Determine value from Realtors, used car dealers, publications, furniture dealers, or other experts on specific types of assets. You must include a copy of any written estimate with your financial statement.

Quick Sale Value –The amount you could reasonably expect from the sale of an asset if you sold it quickly, typically in ninety days or less. This amount generally is less than fair market value, but may be equal to or higher, based on local circumstances. The IRS takes into consideration all personal and real property wherever located. It is straightforward to determine if the amount of your offer is processable. If your figures indicate a processable offer and the IRS disagrees, you may have the opportunity to amend the offer or request an appeal.


RETIRED DEBT CALCULATION If the taxpayer has some loans, for example a car loan, which will pay off within the calculation period used to figure net disposable income available (12 or 24 months) the “retirement” or payoff of the loan creates disposable income for a period of time. For example, if a loan with a $250 per month payment pays off in 6 months of the offer submission, there are 6 months with an additional $250 per month ($1,500) disposable income which must be added to the offer calculation. Retired debt can be a source of question in an offer because the car might need to be replaced. What if it is a lease? You may need to argue that the taxpayer needs to replace the vehicle with like vehicle and payment. Depending on the circumstances, you might be successful. You may need to be at the appeal level to make that argument.

ECONOMIC HARDSHIP NOTE If an OIC is accepted under the provisions of “hardship”, the IRS would agree not to take the Social Security, the retirement account, or the assets and would establish “hardship” status. The rules of including value of such assets in the offered amount would appear to not apply. The Service will look at whether the taxpayers could survive without the asset and if their living expenses fit within the guidelines. Some Revenue Officers take a very hard line on this issue and you may end up in appeals to have your case heard.

CONTINGENT ACCEPTANCE Acceptance of an offer in compromise requires five years of compliance. It is a contract with the IRS. They do monitor offers after they have been accepted and send out warning letters if the taxpayer does not stay in compliance with filings as agreed. My biggest fear is that my client will get an offer in compromise accepted, file and pay their taxes for 4 ½ years, and then before the end of the fifth year, fail to make an estimated tax payment, fail to pay the tax liability in full on April 15, or fail to file a tax return timely. Since the offer in compromise is a contract with the IRS, they are serious about the tax payer remaining in compliance during the entire five year period. If the offer is revoked for failure to comply with the terms and conditions of the offer, all the tax, interest, and penalties due on the original tax liability will become due and payable.

POSSIBILITY OF ACCEPTANCE The IRS “pendulum” has been swinging towards acceptance of offers in compromise since 1992 but given the rapid rises in offer “factories” the IRS is now figuring out ways to reject them or return them faster. The Service is training their people to spot offers from “conveyor belt” or “popsicle stand” type operations and is trying to fairly return those offers. The IRS has hired many new employees to help sort through offers submitted but training is still in process. So many thousands of offers have been submitted that the IRS cannot keep up and is finding new ways to reject or “return” offers.

WAIVER OF THE STATUTE OF LIMITATIONS ON COLLECTIONS By submitting an offer in compromise, and having it received as processable, the ten year collection statue is suspended by law. For offers submitted prior to January 1, 2000, the collection statute was suspended from the submission date to the closure or rejection date plus 1 year. After December 31, 2000, the 10 year collection period was not suspended and continued to run while the offer was being considered but then started to run again after 03-09-2002. The prior waiver provision for suspension of the collection statute was removed temporarily. Effective December 21, 2000, the collection statute – the time the IRS has to collect the balance due – was suspended by law rather than by taxpayers signing the waiver on Form 656. Now the suspension occurs while the IRS processes and reviews the Offer in Compromise, plus 30 days, plus any time a rejected Offer in Compromise is being appealed.

IMPORTANT NOTE: Offer in compromise also suspends the 240 day assessment waiting period required to discharge taxes in a chapter 7 bankruptcy


Lump Sum Cash Offer: to be paid within 5 months of written acceptance. Offer must be submitted with $150 processing fee and 20% of the offered amount.

Short Term Periodic Payment Offer: The offered amount is paid within 24 months of the date the IRS first received the Offer. The $186 processing fee and the first payment must be submitted with the Offer and payments must continue during the investigation of the Offer. All required payments are NOT refundable, but may be designated to a particular tax period or liability.


CONSIDERATIONS When submitting an offer in compromise, you must consider what other options are available. In my opinion, you need to make an initial analysis as to whether or not the taxes could be discharged into bankruptcy or handled in a manner other than offer in compromise. You must make absolutely certain that at the time the offer is filed, it will not interfere with other possible options. Of course, this determination depends on the speed with which the offer in compromise needs to be submitted. Sometimes it is better to establish an installment agreement for a few months while exploring and analyzing other options. Offer in Compromise forms and instructions are available on the Internet at in the “Library” section or at

LONG TERM DEFERRED PAYMENT PLAN – PARTIAL PAYMENT INSTALLMENT AGREEMENT Recently the IRS has been training officers to handle payment plans which allow for the statute of limitations to expire. The revenue officer determines, with approval of management if the taxpayer will ever be able to pay the tax. If not, the taxpayer (non-payer?) will pay net disposable income for the life of the statute of limitations. When the time comes, the statute will expire and the IRS will abate the remaining balance on the accounts. The main purpose appears to be to avoid having to drag through the 12 to 18 month OIC process and then have the taxpayer add value of assets to a long term deferred offer in compromise. I have been told that if the taxpayer has assets that are necessary to sustain them, the assets will not be part of the equation. For example, if a TP has an IRA that provides necessary income, or a small business that is the sole means of support, the IRS will not consider the asset as part of the “collectability” equation.


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This article provides general information about California law. The laws are constantly changing and this article is not intended to provide legal advice about your specific situation. Seek competent legal counsel. Let me advise you about your particular situation.

Gary A. Quackenbush, Esq.

By: Gary A. Quackenbush