Offer in Compromise

How the Program Works

The Offer of Compromise

Sometimes you just cannot pay off the IRS.

If for example you owned a business and used withheld employee taxes for other purposes or if you neglected to report millions in income, you tax liabilty can be staggering.

Fortunately, the IRS is more interested in reaching a quick and reasonable settlement (in its eyes) than dragging things out for years and getting little or nothing in return.

This is the very reason it started the Offer of Compromise Program.

The Offer in Compromise not a gift. Accepting a settlement is a business decision on the part of the IRS.

Instead of spending the time and money it would take to collect the tax (or for people who don't have the means to pay their debt in full), the IRS will decide if it is in its best interest to accept a settlement.

Also an Offer in Compromise is not a negotiation. The IRS has a complex series of formulas that reflect what they could legally collect from you over the next several years.

This amount is generally what you have to offer to the IRS.

The IRS "offer in compromise" process is typically very time-consuming and cumbersome and, according to the Wall Street Journal, the agency rejects most taxpayer offers.

According to the Journal, the IRS accepted only about 12,000 compromise offers in fiscal year 2007, down from 20,000 as recently as 2004. The number of offers received fell to 46,000 in 2007 from 106,000 in 2004.

Reasons for this include rule and procedure changes the IRS claims to have led to fewer frivolous or incomplete taxpayer offers. Another factor is an application fee imposed in 2003 and a new law effective in 2006 that requires most applicants to make an upfront, nonrefundable partial payment when they apply.

This was aimed at discouraging people from making unrealistic offers aimed mainly at stalling tax collectors, according to IRS sources quoted in the article.

However, the IRS National Taxpayer Advocate Nina Olson emphasized her concern over "rules and procedures that limit the accessibility and use" of the compromise program.

Since minor changes can make a big difference to the amount of the offer, it is best to retain an tax professional to prepare the offer for you.

They can make sure you take advantage of all the options available so that your offer is for the lowest amount possible.

Finally, since the IRS wants to encourage future compliance, when you make an Offer in Compromise, you must also sign a firm contract which states that the IRS is willing to forgive your entire tax debt so long as you agree to pay them the amount of your Offer settlement and agree to file and pay your future taxes on time for at least the next five years.

Once your Offer in Compromise is signed and accepted, the IRS cannot come back and change your payments or charge you additional interest or penalties for the tax years you settled on.

It generally takes the IRS six to nine months to process, investigate and accept an Offer in Compromise. This will give you time to collect the money to pay your settlement if needed.

The IRS will also accept payment plans on offers so that you will not necessarily need to come up with all of the money agreed upon at once.

Once your Offer in Compromise is paid in full, you will be permanently released of your entire tax debt for those years and all liens against your name and property will be released.

Then all you have to do from there is stay current on your taxes and payments for the next five years and hopefully you will never have to worry about an IRS tax debt again.

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For more on dealing with the IRS, read:

Dealing with the IRS

IRS Enforcement Tools

This article does not purport to offer legal advice.

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