Using an offer in compromise.

• Author: Marchbein, Joe

In these economic times, more taxpayers are not able to fully pay their federal income taxes when due. There are several methods that may be used to pay tax liabilities in this situation, one of which is an offer in compromise (OIC).

Sec. 7122 permits the IRS to compromise a tax liability on one of the following grounds:

* Doubt as to liability;

* Doubt as to collectability; or

* To promote effective tax administration because either collection of the full amount would cause economic hardship for the taxpayer or compelling public policy or equity considerations provide a sufficient basis for compromising the liability.

This item focuses on offers when there is doubt as to collectability.

Submitting an Offer

A taxpayer makes an offer by filing Form 656, Offer in Compromise. Form 656-B, Collection Information Statement for Businesses, contains detailed instructions for completing the Form 656. In addition to the application, the taxpayer must send a $150 application fee with the offer. This fee can be abated if the monthly household income is not more than the IRS's low-income guidelines. Moreover, other than for the low-income exceptions, if the taxpayer makes a lump-sum cash offer, 20% of the amount offered must be included with the offer. The payment is not refundable even if the IRS denies the offer. This payment rule has been in effect since 2006 and has resulted in a decline in the number of submitted offers. One of the current administration's legislative proposals is to repeal this requirement.

If the taxpayer makes an offer to pay the tax liability using installments, the first payment must be paid with the offer, and the installment payments must be made while the offer is being evaluated. The IRS will return the offer without any appeal rights if the taxpayer does not make the payments as outlined.

The IRS has to act on an offer within two years. If it does not accept or reject the offer within two years, the offer is considered to be accepted. The statute of limitation is suspended while an offer is under consideration.

The IRS offers three types of payment plans:

* Lump-sum cash offer: The offer amount is paid in five or fewer installments;

* Short-term periodic payment option: Payment is made within 24 months from the date the offer is submitted; and

* Deferred periodic payment: Payment is made over the remaining statutory period (normally a maximum of 10 years) for collecting the tax.

Observation: To increase the chances of...