What is a (Doubt a to Collectibility) Offer in Compromise?
An Offer in Compromise is the much touted “PENNIES ON THE DOLLAR” solution to tax debt. TV (and Internet) pitchmen do their best to make an Offer in Compromise sound like it is some new government program recently created by the government to settle tax liabilities for those taxpayers facing financial hardships. It isn’t new. In fact, the US Government has had the authority to settle taxes in some fashion since 1868!
Doubt as to Collectibility offers are the most common type of Offer in Compromise. The IRS considers offers by using a combination of standard allowances and actual expenses to determine a taxpayer’s “Reasonable Collection Potential.” Two other types of Offers in Compromise exist but are hardly ever used: Offers in Compromise based on Doubt as to Liability (DATL Offers) and Offer in Compromise based on Effective Tax Administration (ETA Offers.)
Some (abridged) history
Offers in Compromise have existed in some form since before this country even had an income tax. Offers to settle tax debt were hardly ever submitted, however, because the IRS policy was difficult to follow and not widely publicized.
Version 1.0 of the current Offer in Compromise (DATC) first appeared in 1992, when the IRS issued Policy Statement 5-100. Several changes to the tax code, IRS regulations, and IRS guidance have taken effect since 1992, but the goals of the Offer in Compromise program (for DATC offers) has remained largely the same. These goals, as outlined in the Policy Statement were (and still are) as follows:
- to resolve tax debt accounts which cannot be paid in full
- to collect what the IRS could reasonably collect through other means as quickly and inexpensively as possible
- to provide taxpayers with a fresh start and encourage Compliance with the tax laws going forward
When passing the Internal Revenue Service Restructuring and Reform Act of 1998, congress encouraged the IRS to compromise tax liabilities on grounds other than Doubt as to Liability and Doubt as to Collectibility. The IRS responded with regulations establishing a new type of Offer. Effective Tax Administration Offers can be submitted to the IRS when compromising the liability is necessary to prevent economic hardship, or to encourage voluntary compliance. ETA Offers represent the last-ditch chance at obtaining an Offer that cannot be obtained through other means (DATL or DATC).
In 2005, Congress passed the Tax Increase Prevention and Reconciliation Act of 2005. The Act amended Section 7122 to require that a non-refundable payment be made when a DATC Offer is submitted to the IRS. In 2012, the IRS made significant changes to the amount of future income it considers when calculating an acceptable Offer amount.
The Offer in Compromise Today
Various changes have taken place since version 1.0 of the Offer in Compromise (DATC) program appeared on the scene, the most important changes have been those that affect the calculation of the amount of an Offer.
The current version of the Offer in Compromise booklet actually includes sections in both Form 433-A(OIC) and Form 433-B(OIC) directing you to “determine your minimum offer amount.” The IRS also provides a “pre-qualifier” tool online. This reflects the most recent attempts by the IRS to demystify the offer process and provide taxpayers useful information. However, no matter how streamlined the IRS makes the offer process, taxpayers will always benefit from consulting with a professional before submitting an Offer.
It is important to keep in mind that the IRS has significant discretion in deciding whether or not to grant an Offer in Compromise. Sometimes this means that even if you can prove all of your numbers, and follow the IRS instructions to a “T” the Service may still reject your offer.
However, the basic framework for submitting a sucessful offer based on DATC is as follows:
1) File all prior tax returns
2) Be current with Estimated Tax Payments and/or withholding
3) Provide financial information to support your numbers
4) Offer the appropriate amount
5)Comply with all Tax Law requirements for 5 years after the Offer is accepted
What you should know:
An Offer in Compromise will stop all IRS collection activities once it is submitted.
The CSED clock stops ticking when your Offer in Compromise is pending. What’s that? The IRS has 10 years to collect on a tax debt from the date that the tax is assessed, but this 10 year clocked can be “tolled” (paused) for several different reasons.
Non-compliance is an issue: You will need to be in compliance with IRS requirements for 5 years in order for an Offer to take full effect. (Paying and filing on time annually with the IRS).
If you fail to comply with the tax code during those 5 years, the entire liability comes back.