Offer in compromise: new policy and procedures.

• Author: Preston, Richard W.

The IRS recently issued new offer in compromise guidelines to its collection division. These guidelines should enable taxpayers and their representatives to achieve greater success in negotiating compromise settlements for past due tax liabilities. The message behind the guidelines is very simple--accept more offers in compromise.

In the past, the Service did not look favorably on offers in compromise; very few were accepted. A taxpayer who became delinquent on his tax obligation, and did not have the wherewithal to satisfy this obligation, was very unlikely to get relief from ever increasing interest and penalties.

The new IRS policy is: "Collect what is potentially collectible at the earliest possible time and at the least cost to the Government." Rather than try to intimidate taxpayers into finding dollars that they simply do not have, the Service is adopting a practical approach to limit its expense and hasten the collection of unpaid tax. It plans to do this by collecting the maximum amount possible currently.

Another objective of this new policy is the resolution of accounts receivable that cannot be collected in full or on which there is a legitimate dispute as to the amount owed. The IRS hopes to give taxpayers a fresh start to voluntarily comply with the tax laws. Consequently, as a condition to the acceptance of an offer, the Service will require taxpayers to stay current with all future tax liabilities, including the timely payment of estimates.

To have an offer in compromise considered by the IRS, a taxpayer must establish, to the Service's satisfaction, --the inability to pay; or --doubt as to the actual underlying liability.

In the past it could take up to a year to have an offer in compromise considered. The IRS announced that it hopes to trim this time period to six months. To achieve this goal, the 'Service has issued new user-friendly forms and streamlined its processing procedures. The new forms for submitting an offer in compromise are Forms 656 and 433-A for individuals and 433-B for businesses.

While streamlining the processing procedures, the IRS still uses strict guidelines in evaluating the adequacy of offers. A settlement amount that might be considered fair and adequate by an average person may not be acceptable to the Service.

An offer in compromise must be based on a taxpayer's maximum capacity to pay. This includes all of a taxpayer's equity in assets and present and prospective income. The IRS will also look...