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Offers in compromise.

An Offer in Compromise (OIC) is a settlement of a delinquent tax account for less than the full amount due. Acceptance of an OIC on a delinquent account extinguishes the taxpayer's debt, provided all the terms of the offer are met. The authority to compromise a Federal tax liability is found in Sec. 7122, which states that the Secretary may compromise any civil or criminal case arising under the Internal Revenue laws prior to reference to the Department of justice for prosecution or defense.

While OICs have been an available collection tool for the IRS for many years, the policy for their acceptance changed in 1992, as a result of concerns over an ever-increasing delinquent accounts receivable inventory, and the growing number of cases reported as "currently not collectible." The revised policy statement provides that "[t]he Service will accept an Offer in Compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An Offer in Compromise is a legitimate alternative to declaring a case as currently not collectible or to protracted installment agreements. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the government."

This change in policy has had a dramatic impact on the number of offers received by the Service, as well as on the acceptance rate. In 1992 (the year of the policy change), the IRS received 12,102 offers and accepted 36% of them; in 1996, it received 133,598 offers and accepted 48% of those determined to be processable.

This enormous increase in receipts has resulted in the need. to refine processing procedures to enhance consistency and timeliness in completing OIC investigations. The Service has developed processability criteria used to screen incoming offers. If an offer is determined to be nonprocessable based on these criteria, it is returned to the taxpayer without an investigation of its merits. The most common reasons for an offer being returned to the taxpayer as nonprocessable are:

[ ] A specific amount is not offered. [ ] Appropriate signatures are not present. [ ] A financial statement is not provided. [ ] The offer does not reasonably reflect net equity in assets.

Once an OIC has been determined to be processable, it is generally assigned to a field revenue officer for investigation. This investigation entails consideration of the taxpayer's necessary living expenses (as defined in Internal Revenue Manual Section 5323) in determining a taxpayer's ability to make full or partial payments. It also entails an evaluation of all of the taxpayer's assets, including those that might not be reached through regular enforcement procedures. For example, property owned as tenants by the entirety that might not be reachable for distraint action would be valued, at a reduced rate, in determining total equity in assets. Currently, verification of assets and expenses is required in all offer investigations, regardless of the dollar amount of the liability.

If the investigation indicates an ability to offer more than the original OIC amount, the person assigned to the case should discuss with the taxpayer or his representative what he considers to be an adequate offer amount. Negotiation of an adequate offer is critical to the objectives of the policy statement, and is generally a much better alternative to outright rejection. If an adequate amount cannot be agreed on, or the offer cannot be accepted for other reasons, it will be rejected, and the taxpayer notified of any appeal rights. The most common reasons for rejected offers are:

[ ] A greater amount appears to be collectible. [ ] There are unfiled tax returns. [ ] The taxpayer fails to provide needed information for the offer investigation.

In some cases, an offer may be rejected for public policy reasons.

One of the changes made in 1992, along with the policy change on offers, was the requirement that taxpayers whose OICs are accepted must stay in compliance with all Federal tax filing and payment requirements for a period of five years following acceptance of an offer. Failure to do so will result in reinstatement of the original tax liability, less any payments made. This is an area of concern for the Service, since there is evidence that many taxpayers do not in fact stay in compliance with their filing and payment requirements. Thus, the "fresh start" concept of offers may not be as effective as initially anticipated. The Service is currently studying this development, which may result in further changes to the offer program. Another development that causes concern is the growing number of fraudulent offer applications received with invalid financial information attached. This area is being closely monitored for trends.

A recent change to the OIC form (Form 656, Offer in Compromise) should make it easier for taxpayers to submit offers. The new form package includes instructions, a worksheet to calculate the offer amount and a section on what a taxpayer should know before preparing an offer. Under the new rules, taxpayers may submit offers on photocopied or computer-generated forms. Any type of substitute form must include a statement attesting to agreement to all the terms and conditions set forth in the official Form 656.

OICs continue to be a viable collection tool in those cases in which full payment cannot be secured. The Service will continue to monitor the program and make adjustments as necessary to ensure consistent and equitable use of offers to resolve unpaid tax accounts.
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Article Details
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Author:Johnson, Robert T.
Publication:The Tax Adviser
Date:Jul 1, 1997
Words:904
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