Offer in Compromise Requirements- Choosing Between the Types of Offers
Lump Sum Cash Offer
A taxpayer may choose the lump sum offer, which is defined as an offer where the taxpayer makes five or fewer installment payments within 24 months after the offer is accepted. “If a taxpayer submits a lump sum offer, the taxpayer must include with the Form 656, Offer in Compromise a nonrefundable payment equal to 20 percent of the amount. This payment is required in addition to the $150 application fee” (IRS.gov, “Topic 204 – Offers in Compromise,” 8/22/2013). Under the offer in compromise requirements, the nonrefundable amount cannot be returned to the taxpayer if the offer is either rejected or accepted. Instead, it will be applied to the taxpayer’s liability.
Periodic Payment Offer
The periodic payment offer is defined as an offer where the taxpayer makes six or more monthly payments within 24 months after the offer is accepted. When the taxpayer submits the offer, he or she must also submit the proposed installment payment along with Form 656. This payment is required in addition to the $150 application fee. Similar to the lump sum cash offer, the twenty-percent first installment payment is nonrefundable. “Also, while the IRS is evaluating a periodic payment offer, the taxpayer must continue to make the installment payments provided for under the terms of the offer. These amounts are also nonrefundable” (“Topic 204”). The first and successive installment payments are all applied to the tax liabilities. The “taxpayer has a right to specify the particular tax liabilities to which the periodic payments will be applied” (“Topic 204”).
Appealing a Rejected Offer in Compromise
When the IRS rejects an offer in compromise, the taxpayer is notified by mail. In the letter, the IRS will explain the reason for the rejection and will provide also detailed instructions for how the taxpayer may appeal the decision to the IRS Office of Appeals.
All appeals must be made within 30 days from the date of the letter. Some offers in compromise are returned because the taxpayer failed to provide necessary information specific to filing for bankruptcy, failed to pay the application fee, or failed to file tax returns and/or pay the current tax liability. In this case, returns are different from rejections. The taxpayer has no right of appeal when the application is returned.
Offer in Compromise Requirements - Collateral Agreements
A collateral agreement is specific to offers in compromise. A collateral agreement is defined as the ability of the government to “collect funds in addition to the amount actually secured by the offer or to add additional terms not included in the standard Form 656 agreement, thereby recouping part or all of the difference between the amount of the offer or additional terms of the offer and the liability compromised” (IRS.gov, “Part 5. Collecting Process, Chapter 8. Offer in Compromise, Section 6. Collateral Agreements,” 8/24/2013). If the taxpayer refuses to enter into a collateral agreement, this refusal may serve as a basis for rejecting the taxpayer’s offer.
Keep in mind that collateral agreements are not used to accept an offer where the amount is less than the taxpayer’s current financial condition. Instead, a collateral agreement is specifically appropriate where “significant recovery is anticipated or securing a collateral agreement will facilitate resolution” (“Section 6. Collateral Agreements”).
Tips for a Successful Offer in Compromise
A larger number of offers in compromise applications are returned because they are incomplete. The IRS cannot process an offer if it is missing elements specific to applications and related documentation. To be eligible, all filers must not have an open bankruptcy case, must have filed all federal tax returns at issue, must have filed payroll tax returns and deposits at issue for the last two quarters, must pay the required application fee ($150), must complete and submit Forms 656, 433-A, and/or 433-B (if necessary), and must be current with estimated taxes and income tax withholding for the current year.
The most important tips for a successful offer in compromise is to pay the offer amount; file all tax returns on time; allow the IRS to keep any tax refunds, payments, and credits to reduce your tax liability; and continue to let the IRS keep any tax refunds payable to you even after the offer in compromise is approved.
Lastly, choose a tax professional to help you with the offer in compromise requirements. Because of the complexity of the process, taxpayers often hire a tax professional knowledgeable about the dynamics of the program. You want a tax professional that is experienced and knowledgeable about this area of tax law and truly understands your offer in compromise requirements.