Frost Law
With the 2023 tax season behind us, some individuals may be in a situation where they are unable to pay their tax balance due to the government. While many individuals may request an installment agreement to pay off their balance due, some taxpayers with tax balances due to the Internal Revenue Service may be eligible for an offer-in-compromise (“OIC” or “offer”). An OIC “is an agreement between a taxpayer, or taxpayers, and the government that settles a tax liability for payment of less than the full amount owed.” Internal Revenue Manual (“I.R.M.”) 5.8.1.2.1 (09-23-2008). The IRS has statutory authority to “compromise any civil or criminal case arising under the internal revenue laws.” 26 U.S.C. (“I.R.C.”) § 7122(a).
There are three bases for obtaining an OIC: doubt as to liability, doubt as to collectability, and the promotion of effective tax administration. Treas. Reg. § 301.7122-1(b). Doubt as to liability occurs when “there is a genuine dispute as to the existence or amount of the correct tax liability under the law.” Id. at § 301.7122-1(b)(1). Doubt as to collectability is established “where the taxpayer’s assets and income are less than the full amount of the liability.” Id. at § 301.7122-1(b)(2). Lastly, an OIC may be approved to “promote effective tax administration when the Secretary determines that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship.” Id. at § 301.7122-1(b)(3)(i). Furthermore, if the aforementioned options are not available, the IRS may compromise to promote effective tax administration where policy or equity considerations provide a sufficient basis. Id. at § 301.7122-1(b)(3)(ii). In such a case, the purpose of compromise would be to avoid undermining public confidence that the tax laws are being administered fairly and equitably. Id.
There are several conditions that might prevent an OIC from being considered. These conditions include, but are not limited to, failing to remain in filing compliance, making insufficient estimated tax payments, making untimely federal tax deposits, and filing for bankruptcy. I.R.M. 8.22.7.10 (08-26-2020). The taxpayer must also submit the formal application for an OIC. The application for an OIC is the current version of Form 656 (Offer in Compromise) or Form 656-L (Offer in Compromise Doubt as to Liability). I.R.M. 8.23.1.5 (08-23-2021); see also About Form 656, Offer in Compromise, IRS (February 13, 2024), https://www.irs.gov/forms-pubs/about-form-656. The application also requires the completion of Form 433-A (OIC) (Collection Information Statement for Wage Earners and Self-Employed Individuals) and/or Form 433-B (OIC) (Collection Information Statement for Businesses), whichever is applicable. See About Form 656, Offer in Compromise, IRS (providing links to and pamphlets regarding the various forms).
In addition to completing the necessary forms noted above, the taxpayer must also pay the user fee and an additional partial initial payment. I.R.M. 8.23.1.5.1 (08-23-2021). Taxpayers submitting offers under doubt as to liability or meeting low-income certification criteria do not need to pay the application fee or the initial payment. Id.; I.R.M. 5.8.1.13 (05-25-2023). Typically, the application fee will be applied to the overall liability, not the amount of the offer. I.R.M. 8.23.1.5.1 (08-23-2021). With respect to effective tax administration and doubt as to collectability OIC, there are two possible payment schedules which determine the amount of the initial payment and timing of subsequent payment: lump-sum cash OIC or periodic payment OIC. I.R.C. § 7122(c). A lump-sum OIC is “any offer of payments made in 5 or fewer installments” within five months of offer acceptance unless an exception exists. Id. at § 7122(c)(1)(A)(ii); I.R.M. 5.8.1.13 (05-25-2023). A lump-sum OIC requires an initial payment of 20 percent of the amount of such offer. I.R.C. § 7122(c)(1)(A)(i). A periodic payment OIC, which is payable in 6 to 24 months, requires an initial payment of the amount of the first proposed installment and additional installments paid in accordance with the proposed terms while the OIC is under consideration. Id. at § 7122(c)(1)(B)(i); I.R.M. 5.8.1.13 (05-25-2023). For either type of payment schedule, these initial payments are nonrefundable, meaning it will not be returned even if the offer is returned, withdrawn, terminated, or rejected. I.R.M. 5.8.1.13 (05-25-2023). If the offer is not processable, however, it will be returned. Id. An offer may be deemed not processable for a variety of reasons, including, but not limited to, the taxpayer being in bankruptcy or if the offer is based on a liability previously referred to the Department of Justice for prosecution or defense. I.R.M. 5.8.2.4.1 (06-14-2024).
Once the IRS receives the application for the OIC along with the relevant payment(s), an Offer Examiner or Offer Specialist will evaluate the application based on various schedules of national and local financial standards designed to provide taxpayers an adequate means of calculating basic living expenses while they fulfill the terms of the OIC. I.R.C. § 7122(d)(2)(A). An OIC is deemed accepted “if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer.” Id. at § 7122(f). Furthermore, broadly speaking, while the IRS is reviewing the application and for 30 days thereafter if the offer is rejected, they are not entitled to levy on property owned by the offer taxpayer. I.R.M. 5.8.1.16 (05-25-2023). If the offer is rejected and the taxpayer appeals the rejection, levying is also prohibited during the pending appeal. Id. While a levy is prohibited during an OIC, the statutory period of time the IRS has to collect the tax is suspended. I.R.M. 8.23.1.3 (08-23-2021).
Taxpayers interested in resolving their balances with the IRS have a variety of options to choose from, including an OIC. If their circumstances warrant it, an OIC could provide an effective path forward. If you have any questions or concerns about an offer in compromise then please reach out to our team at (410) 497-5947 or schedule a confidential consultation.
With the 2023 tax season behind us, some individuals may be in a situation where they are unable to pay their tax balance due to the government. While many individuals may request an installment agreement to pay off their balance due, some taxpayers with tax balances due to the Internal Revenue Service may be eligible for an offer-in-compromise (“OIC” or “offer”). An OIC “is an agreement between a taxpayer, or taxpayers, and the government that settles a tax liability for payment of less than the full amount owed.” Internal Revenue Manual (“I.R.M.”) 5.8.1.2.1 (09-23-2008). The IRS has statutory authority to “compromise any civil or criminal case arising under the internal revenue laws.” 26 U.S.C. (“I.R.C.”) § 7122(a).
There are three bases for obtaining an OIC: doubt as to liability, doubt as to collectability, and the promotion of effective tax administration. Treas. Reg. § 301.7122-1(b). Doubt as to liability occurs when “there is a genuine dispute as to the existence or amount of the correct tax liability under the law.” Id. at § 301.7122-1(b)(1). Doubt as to collectability is established “where the taxpayer’s assets and income are less than the full amount of the liability.” Id. at § 301.7122-1(b)(2). Lastly, an OIC may be approved to “promote effective tax administration when the Secretary determines that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship.” Id. at § 301.7122-1(b)(3)(i). Furthermore, if the aforementioned options are not available, the IRS may compromise to promote effective tax administration where policy or equity considerations provide a sufficient basis. Id. at § 301.7122-1(b)(3)(ii). In such a case, the purpose of compromise would be to avoid undermining public confidence that the tax laws are being administered fairly and equitably. Id.
There are several conditions that might prevent an OIC from being considered. These conditions include, but are not limited to, failing to remain in filing compliance, making insufficient estimated tax payments, making untimely federal tax deposits, and filing for bankruptcy. I.R.M. 8.22.7.10 (08-26-2020). The taxpayer must also submit the formal application for an OIC. The application for an OIC is the current version of Form 656 (Offer in Compromise) or Form 656-L (Offer in Compromise Doubt as to Liability). I.R.M. 8.23.1.5 (08-23-2021); see also About Form 656, Offer in Compromise, IRS (February 13, 2024), https://www.irs.gov/forms-pubs/about-form-656. The application also requires the completion of Form 433-A (OIC) (Collection Information Statement for Wage Earners and Self-Employed Individuals) and/or Form 433-B (OIC) (Collection Information Statement for Businesses), whichever is applicable. See About Form 656, Offer in Compromise, IRS (providing links to and pamphlets regarding the various forms).
In addition to completing the necessary forms noted above, the taxpayer must also pay the user fee and an additional partial initial payment. I.R.M. 8.23.1.5.1 (08-23-2021). Taxpayers submitting offers under doubt as to liability or meeting low-income certification criteria do not need to pay the application fee or the initial payment. Id.; I.R.M. 5.8.1.13 (05-25-2023). Typically, the application fee will be applied to the overall liability, not the amount of the offer. I.R.M. 8.23.1.5.1 (08-23-2021). With respect to effective tax administration and doubt as to collectability OIC, there are two possible payment schedules which determine the amount of the initial payment and timing of subsequent payment: lump-sum cash OIC or periodic payment OIC. I.R.C. § 7122(c). A lump-sum OIC is “any offer of payments made in 5 or fewer installments” within five months of offer acceptance unless an exception exists. Id. at § 7122(c)(1)(A)(ii); I.R.M. 5.8.1.13 (05-25-2023). A lump-sum OIC requires an initial payment of 20 percent of the amount of such offer. I.R.C. § 7122(c)(1)(A)(i). A periodic payment OIC, which is payable in 6 to 24 months, requires an initial payment of the amount of the first proposed installment and additional installments paid in accordance with the proposed terms while the OIC is under consideration. Id. at § 7122(c)(1)(B)(i); I.R.M. 5.8.1.13 (05-25-2023). For either type of payment schedule, these initial payments are nonrefundable, meaning it will not be returned even if the offer is returned, withdrawn, terminated, or rejected. I.R.M. 5.8.1.13 (05-25-2023). If the offer is not processable, however, it will be returned. Id. An offer may be deemed not processable for a variety of reasons, including, but not limited to, the taxpayer being in bankruptcy or if the offer is based on a liability previously referred to the Department of Justice for prosecution or defense. I.R.M. 5.8.2.4.1 (06-14-2024).
Once the IRS receives the application for the OIC along with the relevant payment(s), an Offer Examiner or Offer Specialist will evaluate the application based on various schedules of national and local financial standards designed to provide taxpayers an adequate means of calculating basic living expenses while they fulfill the terms of the OIC. I.R.C. § 7122(d)(2)(A). An OIC is deemed accepted “if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer.” Id. at § 7122(f). Furthermore, broadly speaking, while the IRS is reviewing the application and for 30 days thereafter if the offer is rejected, they are not entitled to levy on property owned by the offer taxpayer. I.R.M. 5.8.1.16 (05-25-2023). If the offer is rejected and the taxpayer appeals the rejection, levying is also prohibited during the pending appeal. Id. While a levy is prohibited during an OIC, the statutory period of time the IRS has to collect the tax is suspended. I.R.M. 8.23.1.3 (08-23-2021).
Taxpayers interested in resolving their balances with the IRS have a variety of options to choose from, including an OIC. If their circumstances warrant it, an OIC could provide an effective path forward. If you have any questions or concerns about an offer in compromise then please reach out to our team at (410) 497-5947 or schedule a confidential consultation.
