Tanya Baber, a Certified Tax Resolution Specialist, advises not to think of an Offer in Compromise as a bid or negotiation. Getting an Offer in Compromise accepted, whether it’s based on Doubt as to Collectibility, Doubt as to Liability, or Effective Tax Administration, is all about the facts, circumstances, and understanding the law.
Here are a few insider guidelines and hints from Baber's Offer in Compromise webinar that may be helpful to your cases.
Note that Baber suggests the following the information, but tax professionals should do some additional research before preparing a case to confirm accuracy, as IRS codes can change often and vary in different situations.
Knowing Who Won’t be Considered for an OIC
Not every client who has a large amount of debt will be considered for an OIC. An OIC will not be processed for a client who:
- Has unfiled tax returns – the IRS will immediately return any OIC applications involving taxpayers with outstanding returns.
- Has a history of not paying their taxes and non-compliance.
- Deliberately avoided tax payment.
- Is a tax protestor.
Making an Offer Processable
There are two major requirements for an OIC to be processable.
First, the client must be compliant. All of his or her required returns have been filed, (if they’re not, the client is allowed 30 days to get them filed) and he or she must be current on estimated taxes for the current year.
Second, the client must not be in bankruptcy.
Helpful hint: IRM 126.96.36.199.18 has a section that states that taxpayer compliance will only apply to the most recent six years, no matter how long the taxpayer has not been in compliance. This statement will only be disregarded with prior managerial approval.
A new important notice from the IRS states that they will return any newly filed OIC application and included fees if the taxpayer has not filed all the required returns. Exceptions to current year tax returns may apply.
Two-year Deemed Acceptance
One way that an offer can be accepted is if it has been submitted for 24 months without being rejected. At the two-year mark, if nothing has been done with the offer, it will automatically be deemed accepted.
The exception to this rule is that if the tax liability is in dispute in a judicial proceeding, the 24-month period will be tolled.
OICs and Liens
Making an OIC stops enforced collection action, but a federal tax lien can still be filed. Liens do not fall under collection actions. An OIC will also not remove any liens.
Using Doubt as to Liability
Doubt as to Liability is when a client does not believe he or she owes the debt the IRS says he or she owes. Of the three types of offers, (Doubt as to Liability, Doubt as to Collectability, and Effective Tax Administration) Doubt as to Liability is rare.
This type of offer can be used when:
- The statute of limitations has run on collections.
- The tax was discharged in bankruptcy.
- The tax has not been, or was improperly, assessed.
- The tax was not actually due.
- A penalty was incorrectly assessed.
You can never use this offer if the client’s tax liability has been previously adjudicated in tax court.
The Disadvantages of OICs
While an OIC can significantly decrease the debt your client owes and give you more billable work to do outside of tax season, there are a couple major drawbacks to making an OIC that you and your client may want to consider before starting the process.
The first drawback is that making an OIC stops the statute of limitations. It is not uncommon for Offer in Compromise cases to take from a year to a year and a half, and if the statute of limitations on the client’s debt is upcoming, you may not want to make an OIC that extends that timeline.
A second drawback is that if your client does not remain compliant after an accepted OIC, his or her OIC may be voided, and the IRS will then have tons of information on your client from everything he or she had to disclose during the OIC process.
For more information, check out Baber’s full-length webinar here.