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Explanation of irs settlement program offer in compromise

What is an Offer In Compromise?

The Offer in Compromise (OIC) program, in the United States, is an Internal Revenue Service (IRS) program under 26 U.S.C. § 7122 which allows qualified individuals with an unpaid tax debt to negotiate a settled amount that is less than the total owed to clear the debt. A taxpayer uses the checklist in the Form 656, Offer in Compromise, package to determine if the taxpayer is eligible for the offer in compromise program. The objective of the OIC program is to accept a compromise when acceptance is in the best interests of both the taxpayer and the government and promotes voluntary compliance with all future payment and filing requirements..

Qualifying Conditions

At least one of three conditions must be met to qualify a taxpayer for consideration of an OIC settlement:

  • Doubt as to Liability — Debtor can show reason for doubt that the assessed tax liability is correct
  • Doubt as to Collectibility — Debtor can show that the debt is likely uncollectable in full by the IRS under any circumstances
  • Effective Tax Administration — Debtor does not contest liability or collectibility but can demonstrate extenuating or special circumstances that the collection of the debt would "create an economic hardship or would be unfair and inequitable." This Offer in Compromise program is available for any taxpayer, but is primarily used by individuals that are elderly, disabled, or have special extenuating circumstances.

Partial Payment

Effective July 15, 2006, the IRS made changes to the Offer in Compromise program requiring that an up-front twenty percent, non-refundable payment plus $150 be submitted along with the Offer of Compromise in the case of a cash offer. An Offer submitted without the required fees is subject to rejections without appeal. After the IRS receives the Offer, the IRS has two years to make a decision. If the decision is not reached by that time, then the Offer is automatically accepted.

Under the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA 2005) if a taxpayer chooses to make payments over time, i.e. monthly, the taxpayer must include with the offer the first month's payment. The taxpayer is not required to submit the 20%, which applies only to the lump sum payment option. Then during the time that the offer is being considered by the IRS, the taxpayer must keep making the monthly payments to keep the offer current. If the taxpayer fails to make the payments, the offer will be returned to the taxpayer.

In the case of both the $150 application fee and either the 20% down payment or the monthly payments, a low income taxpayer may be exempt from both. The taxpayer should review the Form 656A to determine whether these fees and payments apply to them.

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